4. Taxation of Property Rental Income in France
- Summary of Tax Regimes
- Furnished Lettings
- Unfurnished Lettings
4.4. 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 (land/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:
- 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.
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 although you need to consider timing issues, which are discussed below.
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 a particular type of tax regime such as 'Robien' or Borloo' you cannot benefit from use of the system of micro-foncier. However, schemes such similar schemes as 'Scellier', 'Duflot' and 'Pinel' are eligible.
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.
For the 2020 income tax return (2019 income) we have prepared some basic guidance for those who wish to declare rental income from unfurnished lettings in France, which you can find at: Income Tax Return 2020 for Furnished Rental Income.
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.
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. However, you cannot deduct agents and notaire fees associated with acquisition of the property.
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.
If you elect to be taxed on the basis of actual costs you can charge repair, maintenance and improvement works against rental income.
However, not all works of improvement are accepted as a deductible cost, and major construction works are expressly excluded.
The problem for any landlord is establishing the boundary line between these different types of works, and the rule that applies if they are carried out simultaneously, as is frequently the case.
Unfortunately, the law on this matter does not offer a great deal of precision.
Article 31 of the French tax code states that:
"Les charges de la propriété déductibles pour la détermination du revenu net comprennent….. a) Les dépenses de réparation et d'entretien effectivement supportées par le propriétaire……… b) Les dépenses d'amélioration afférentes aux locaux d'habitation, à l'exclusion des frais correspondant à des travaux de construction, de reconstruction ou d'agrandissement."
There are regulations that provide more guidance, but there is no list of works that fall into each category and it is only as a result of case law that some greater level of definition has developed.
We can consider each of the works categories in turn.
Repairs and Maintenance
Repairs and maintenance are defined in the regulations as "work having as their object to maintain or restore a building to good condition and allow normal use for its intended purpose, without changing the solidity, the configuration or original amenities."
They also include "the restoration, repair or replacement of essential facilities to maintain the building capable of being used for its intended purpose."
The regulations state that the mere fact that the expense involved replacing a part or obsolete equipment with more modern equipment is not sufficient to deprive it of its character of expenditure of repair or maintenance.
Where repairs and maintenance are accompanied by improvement works then, depending on the nature of the works, the whole may be considered to be improvement works.
If the latter are, in turn, considered to be part of other major construction works that have been carried out, then they would not be deductible.
Improvement expenses are defined in the regulations as "those that are intended to provide new or improved facilities, an increased level of comfort, or amenities better adapted to modern living, provided the works do not change the structure of the building."
Accordingly, example works that have been accepted as deductible are a new central heating system, new toilet and bathroom facilities within the property, a new kitchen within the property, a lift, and improved drainage system.
The difficulties arise when improvement works are undertaken following major construction works, or simultaneously with such works. In practice it is often difficult to separate the two elements.
The issue frequently turns on the scale of the construction works, leading to the general conclusion that where such works are relatively modest the improvements works would be separated out and accepted as deductible.
Indeed, in some cases, even the construction works may be accepted as deductible. Thus, prima facia, a bathroom extension would not be eligible, although it is quite possible the tax office would allow it if was a sensible solution to the improvement of a property, particularly if there was no alternative. The plumbing works within it would almost certainly be deductible.
Where the construction works were significant and the improvement works merely accessory, the latter have been held to be not deductible.
In addition, in another case, where improvement works could not be separated from other major construction works they were assimilated as the latter and found not to be deductible.
Clearly, in all of this, some careful wording of the estimate and the invoice by the builder might help!
Major Construction Works
Those works that are expressly not chargeable are those which either:
- Make important change to the structure of the building;
- Improvement works that by their nature are equivalent to reconstruction of the building, or;
- Works that increase the volume or living space of the property.
The reason why major construction works are not admissible is that they lead to an increase in the value of the property, so cannot also be considered to be a deductible expense. Such works are then an eligible allowance against capital gains tax, in the event of sale of the property.
Of course, improvement works generally also lead to an increase in value, but such works are accepted as deductible in order to encourage improvement of the housing stock.
Works which have been determined to be non-deductible include:
- Full or partial demolition of a building with a view to its reconstruction;
- Change of use of a building involving major reconstruction work;
- An increase in the number of units in a property involving major reconstruction of many of the structural elements of the property.
You can read about some recent case law on the issue in our Newsletter article Tax Deductibility of Conversion Works.
In addition, any increase in the size or height of the property is unlikely to be accepted as deductible, save where they are minor and/or necessary for the installation of modern amenities.
However, where an owner converted two en-suite bedrooms into a three-roomed single apartment, without undertaking any major construction works, the works were held to be deductible by the courts.
Where you are undertaking major construction and/or conversion works, it may be more appropriate for you to adopt a corporate taxation structure, but there are significant implications of doing so, on which professional advice should be taken.
Works carried out on a DIY basis by the landlord are eligible, but only for the cost of the materials.
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.
Timing of Works
In relation to an empty property in which building works are carried out to make available for letting for the first time, only those works paid in the year in which the property is let are automatically deductible.
So building works carried out and paid in 2021 for a property let in 2022 would not necessarily be deductible. Only if the building works were paid in 2021 would the costs be deductible.
What this can frequently mean in practice is that the initial costs to prepare a property for letting are not deductible.
One possible solution here is to borrow to fund the acquisition and building works, as interest is tax deductible. Another is to delay invoicing for the works. Alternatively, before you start the works, make a visit to your local tax office to discuss the issue with them.
The rule is different for works carried out between lettings, when the tax authority normally allow a period of time for re-letting following works.
The period allowed between lettings is a maximum of two years, but possibly less if demand in the locality for such accommodation was considered to be strong.
If you obtain income tax relief for works then it is not possible to also obtain that same relief against capital gains tax, as we set out in Capital Gains on Rented Properties.
The whole issue is often 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 a good accountant is advisable before you start any major construction works.
Accounting for Losses
In the event that you incur a loss in a year (due, for instance, to major renovation works) then you are entitled to carry forward losses.
A rental deficit recorded in a year is deductible from your overall taxable income up to €10,700 a year, although there is particular treatment of interest on loans. Any excess can be carried forward against your total income for the following 6 years and against your taxable rental income for the next 10 years.
In terms of loan interest:
Where your loan interest is less than your gross rental income the tax authorities consider that the deficit is entirely the result of the other deductible expenses. It is then totally imputable to your overall income, up to € 10,700 per year. For example, in 2022 you received €10,000 in rent, incurred €8,000 in charges (including works) and paid €3,000 in loan interest, giving a deficit of €1,000. Since your rents absorb all of your loan interest, this deficit is entirely attributable to your total income.
Where your loan interest is higher than your gross income the deficit arising from the excess portion of the interest is deducted only from your rental income for the following 10 years. For example, in 2022, you received €6,000 in rent, incurred €8,000 in deductible expenses and paid €10,000 in loan interest. Your overall deficit of €12,000 comes from loan interest of €4,000 and other charges of €8,000. You can charge the latter amount in full against your overall income, as it is less than €10,700. The €4,000 deficit from loan interest can only be charged to your rental income for the next 10 years.
If you let out a number of properties, losses on one property must be offset against the rental profits on your other rental properties to arrive at a total net profit or loss for the year.
These concessions apply provided you continue to let property for at least three years.
The use of a déficit foncier (as the deficit is called) to reduce your income tax liability does have implications when you come to sell the property, where you realise a capital gain. If you have used a deficit to reduce your income tax bill then you cannot later deduct the cost of major works from the capital gains calcuation. You have to make a choice.
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.
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.
The option for the régime réel may be made until the date of filing of your tax declaration, as can a switch from régime réel to micro-foncier. The option applies for 3 years, so is not irrevocable.
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. If you seek assistance with finding an English-language speaking professional, you can contact us at Letting of Property in France.
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 17.2% (2022 for 2021 income) on net rental income. This charge is deductible against income tax at the rate of 6.8%.
Non-residents from outside of the EEA are also liable for the social charges of 17.2% on unfurnished lettings, although EEA residents not in the French health system only pay a 'solidarity tax' at the rate of 7.5%. The charges are not deductible as is the case for residents.
Similarly, EEA nationals resident in France on an S1 certificate of exemption for health cover only pay at the rate of 7.5%.
You can read about some of the important legal changes concerning social charges at Reform of Social Charges and in Court Ruling Ends Social Charges Saga.
In relation to rental income received on UK property by French residents, 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.
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