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French Taxation

Tax Deductibility of Conversion Works

Tuesday 09 March 2021

A couple who converted their French manor house into flats have been denied tax relief on the works.

In a case that was recently heard in the Supreme administrative court in France, the Conseil d’Etat, a couple purchased a maison d’maître with the express purpose of converting the property into flats for letting.

The property was purchased through a French property company, called a Société Civile Immobilière (SCI), to which their children were associated.

Over several years the family converted the house and a barn into twelve self-contained apartments. Inevitably, this necessitated major internal refurbishment work, the installation of kitchens and sanitary facilities in each of the flats and the significant changes to the water, electricity and sewerage systems.

The cost of the works was claimed as a deductible expense on their income tax return.

Arising out of a tax investigation, the tax authority questioned the deductibility of the expenses, which were considered to be reconstruction and enlargement of the property.

As a result, Mr. and Mrs. B were subject to additional income tax and social charges and penalties.

The couple challenged the assessment in the courts, but in three rulings by judges sitting in Pau their case was rejected.

The couple appealed the case to the Conseil d’Etat, when their case was also thrown out.

The judges based their decision on Article 31 of the French tax code, which states that only repair and improvement works were deductible and that works of reconstruction or enlargement were not an eligible expense:

"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."

Accordingly, building works involving the creation of new residential premises could not be deductible against rental income.

Géraud Nayral, from Cabinet Budiz, a multi-lingual tax accountant, who specialises in property lettings, states:

"The French tax authority closely scrutinises real estate activity, particularly expenses deducted against rental income, as the amounts involved are often significant.

There are different rules that apply, depending on your circumstances and the choices you make. In this case, had the owners adopted the corporate tax option the expenses would have been deductible, although this is not a suitable choice for most landlords."

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