French Rental Income Tax - Provision for Depreciation
Thursday 03 June 2021
Landlords of furnished accommodation in France can depreciate their property and thereby reduce taxable profits.
If you rent out furnished accommodation in France you generally have the choice of a fixed allowance for income tax against rental income (micro-entreprise) or adopting profit and loss accounting, called the régime réel.
In the latter case, you can deduct all eligible expenses against rental income, including loan interest.
You are also entitled to depreciate the fixed assets - both the property and fixtures and fittings, excluding the land. Major building works can also be depreciated.
In accounting terms, depreciation lowers the value of the fixed asset until in the balance sheet it has no value.
That it is possible to depreciate what is generally an appreciating asset is a quirk of accounting rules!
In French, depreciation is called amortissement.
The amount of depreciation declared each year is a non-cash cost, deductible against profits.
Different elements of the property are depreciated at slightly different rates, but overall, it is around 2% to 3% per annum. Thus, if you have a property valued at €250,000 you can record depreciation of up to €7,500 a year, although the amount will reduce each year as the book value of the property falls.
There are also rules that prevent such favourable tax treatment being abused, notably that the amount of depreciation cannot generate a loss. Thus, on rental income of €10,000, running costs of €6,000 and depreciation of €5,000, only €4,000 of depreciation would be permitted in the year, although it could be applied in later years.
When it comes to selling the property, you also benefit from the fact that it is not the depreciated value of the property that is used to determine capital gain, but the original purchase price, plus an allowance for duration of ownership.
Whether it would make sense for you to use the régime reel over micro-entreprise can only be determined by an examination of your circumstances. Our guide below provides information on the points you need to consider.
Géraud Nayral, from our tax partners Cabinet Budiz, who specialise in the taxation of rental properties, states that: "Depreciation is a useful tax-saving tool, but it is important to act early in considering which system of taxation to adopt as costs can only depreciated where they occur after the start of your lettings activity, not prior to it."
It would require that you engage an accountant to maintain your books, something that is not necessary for a micro-entreprise, but if your eligible costs are more than the fixed allowance, then it is worth considering.
UPDATE April 2023: The government is considering abolishing the right of landlords to depreciate, which you can read about at Taxation of Holiday Rental Income