4. Taxation of Property Rental Income in France
- 4.1. Non-Residents
4.2. Summary of Tax Regimes
4.3. Furnished Lettings
4.4. Unfurnished Lettings
4.4. Taxation of Rental Income From Unfurnished Lettings
While rental income from furnished property is taxed under the tax regime of Bénéfices Industriels Commerciaux (BIC) outlined in section 4.3. rental income from unfurnished property is taxed under a system of revenus fonciers (property income).
This tax regime applies to both residential and certain non-residential property, but the following guidance notes are restricted to residential property.
Two income tax regimes apply for revenus fonciers - i.Micro-Foncier and ii. Régime Réel.
In addition, all landlords are liable for the social charges, called prélèvements sociaux.
Where your total rental income from unfurnished property does not exceed €15,000 a year then you are entitled (but not obliged) to be taxed under the system of micro-foncier.
This income figure is doubled if the rental property is owned by a couple and run by them.
Under this system the tax authority applies an automatic allowance of 30% against your gross rental income.
This means that you do not need to calculate and deduct actual costs against gross income to arrive at a figure for taxable profits, as the automatic allowance will be used.
You will be taxed on 70% of your gross rental income.
Accordingly, if your actual eligible costs are less than 30% of gross income then you would benefit from being taxed under this system.
If your costs are higher than 30% then you would be better off electing to be taxed under the régime réel, where you are taxed on the basis of actual net income.
You cannot carry forward losses incurred in the year under the regime of micro-foncier in the same way as is possible with the régime réel.
So, if you undertake eligible major works to a property to get it ready for letting, then you are likely to be better off electing for the régime réel.
The rate of taxation under micro-foncier will depend on your family circumstances. A flat rate level of taxation will not apply as occurs with company tax – you will be taxed on a progressive basis as if you were earning a salary.
If you let a unfurnished property using one of the special tax regimes outlined below in 4.4.3. then you cannot benefit from use of the system of micro-foncier. There is similar exclusion for listed buildings (monuments historiques), properties located in conservation areas (Malraux) and urban revitalisation areas (Zone Franche Urbaine).
If the property is held through a French property company (Société Civile Immobilière (SCI) it is still possible to use this tax regime, provided the SCI is not taxed on the basis of company taxation. Those in such a 'fiscally transparent' company will be liable for tax on an individual basis in proportion to their own share of the income of the property, and to the extent to which they are otherwise liable to French income tax.
4.4.2. Régime Réel
If your eligible costs are greater than 30% of your gross rental income then you would be better off choosing to be taxed under the régime réel.
Similarly, you are obliged to use the régime réel if your rental income is in excess of €15,000 per year.
Under the regime réel your tax liability is determined after deducting your actual eligible costs against your gross rental income.
These eligible costs are set out in the Code général des impôts, CGI. - Article 31. They include general management costs, the costs of property insurance, local property taxes, the costs of a managing agent, guardian, caretaker, or gardener and the costs of insurance taken out against the risk of non-payment of rent by the tenant.
Also deductible are the interest costs associated with the repair or improvement of a rented property, as well as the interest costs on a mortgage for a property purchased with a view to it being let. It is irrelevant whether these interest costs arise from a secured or unsecured loan.
You can also deduct the fees associated with taking out a loan, as well as life insurance premiums payable to guarantee the loan.
There are particular rules governing the depreciation costs of new build investment properties purchased for letting, which we do not consider here, and on which you are strongly advised to take professional advice.
There are important limits on the deductibility of certain building works.
Whilst the costs of repair and maintenance of the property are directly deductible, works to increase the size of a property, or add additional units, are not deductible.
Neither would major works of 'construction or reconstruction'.
These major works not considered to be eligible are known as travaux de construction et reconstruction.
Depending on the nature and scale of the works improvements to a property are generally deductible, but only on condition they do not increase the size of the property and they are not ancillary to other major construction works.
Neither would improvement works be deductible if you had obtained tax relief on the works, such as for energy conservation.
Certain other works, such as a new swimming pool, would also not be deductible.
This is often a difficult area, due to the frequently mixed nature of a programme of works (repairs, maintenance, improvement, and new construction), and a discussion with your local tax office and/or accountant is advisable before you start any major construction works.
You cannot deduct the labour cost of any DIY work carried out, although you can charge the materials used.
However, local offices are often reluctant to accept invoices for materials only, so make sure the invoice has on it the address of the property, and not that of your principal home. You may also want to take before and after photos as proof, or discuss the project with the local office before you start.
In the event that you incur a loss in the year (due, for instance, to major renovation works) then you are entitled to carry forward losses.
If you let out a number of property losses on one property must be offset against the rental profits on another rented property to arrive at a total net profit or loss for the year.
In principle, losses are only chargeable against rental earnings (revenus fonciers) for 10 years.
However, losses other than those arising from interest costs are chargeable against your total earnings, up to a maximum of €10,700 a year.
If the losses are greater than this then they are chargeable against rental income for up to 10 years.
That part of the deficit resulting from interest costs is chargeable against rental income for up to 10 years.
These concessions apply provided you continue to let property for at least three years,
In the calculation of the deficit, the treatment of interest costs is a little peculiar, as rental income is initially charged against interest costs to arrive at the interest deficit.
In the following example the method gives a deficit against interest costs of €3,400, with other costs at €5,600. Only the latter figure can be charged to global revenues in the year, with the €3,400 chargeable against rental income the following year.
Table: Calculation of Deficit
|Gross Rental Income||€10,000
|General Expenses||- €5,600
|Interest Costs||- €13,400
If you elect for the régime réel (or you obliged to use it), it would be prudent to engage a good accountant to assist with the bookeeping and tax declaration, at least in the first year of operation. The tax form you need to complete is the F2044.
If you elect to be taxed in this way then it is irrevocable for a period of three years. At the end of this period it is renewable on an annual basis.
On this basis you need to carefully consider your likely costs over three years before you jump for this option.
Whilst you will not be required to produce the invoices and receipts for the purposes of the tax declaration, you can later be asked to produce them by the tax authority.
If you are considering adopting the régime réel we strongly recommend you take appropriate professional advice, ideally prior to purchase of the property and/or commencement of any major building works.
4.4.3. Social Charges
In addition to income tax a landlord is liable for the social charges, called the prélèvements sociaux, at the rate of 15.5% on net rental income. This charge is deductible against income tax at the rate of 5.1%.
Since 1st Jan 2013 non-residents are also be liable for the social charges of 15.5% on unfurnished lettings. This rule is retrospective to rental income earned in 2012.
In relation to rental income received on UK property, this income is taxable in the UK, although the elimination of double taxation occurs by way of a 'tax credit'. In practice, it all amounts to the same thing - you will not pay any social charges on the rental income.
4.4.4. Special Tax Regimes
There are a number of special tax regimes that are available to landlords who are prepared to let a property on a concessionary basis for a minimum period of nine years.
There are also investment funds that offer the possibility of investing in this type of letting.
Chief amongst the schemes are those of 'Scellier' and 'Duflot' named after the politicians who introduced them.
You are strongly advised to take professional advice before you invest in one of these schemes. The tax benefits of these schemes are not as generous as was the case in the past, and other conditions are imposed which have reduced their attraction as a tax break.
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