Capital Gains Tax on Sale of Rental Property
20th Sept 2022
What are the capital gains tax rules that apply on the sale of a furnished rental property?
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If you let out property in France, when you come to sell it, you will have a potential liability to capital gains tax.
The rules that apply will depend on whether you are a 'non-professional' landlord (Loueur en Meublé Non Professionnel - LMNP) or a 'professional landlord' (Loueur Meublé Professionnel - LMP). The terms are strictly fiscal.
LMP landlords are those whose gross rental income is exceeds €23,000, and which is greater than their other income.
Non-Professional Landlords
Capital gains on the sale of the property are taxed according to the default system for private individuals.
That is to say, any gains are taxed on the basis of the difference between the sale and purchase price, less eligible expenses and an allowance for duration of ownership. Geraud Nayral of French tax partners Cabinet Budiz states that: "Where the tax system of 'régime réel' is used, tax relief on invoices that have been booked in the accounts of the LMNP won't be able to be offset from the final CGT bill as they had been accounted for already."
The basic rate of the CGT tax is 19% plus 17.5% social charges (prélèvements sociaux), although EEA and UK nationals not in the French health system pay social charges at the reduced rate of 7.5%, giving a total rate of 26.5%.
There is tapering of both taxes based on duration of ownership:
CGT is reduced by 6% per year of ownership beyond the 5th year, giving complete exemption after 22 years.
Social charges are reduced by a small amount each year, with complete exemption granted after 30 years have elapsed.
There is no CGT liability on the gift or inheritance of the property, although gift and inheritances taxes may be payable.
Professional Landlords
Professional landlords are taxed as a business (plus-values professionnelles), with rules that are very different.
As a business, you will therefore ordinally use the tax regime of régime réel rather than micro-entreprise, as it will be more tax efficient.
Depending on the circumstances LMP landlords are potentially liable for three taxes:
Income tax;
Social charges and;
Social security contributions.
Provided the property has been held for at least 2 years, the rules make a distinction between 'short-term' gains and 'long-term' gains.
Short-Term Gains
The so-called short-term part of the calculation corresponds to all of the annual depreciation applied to the property.
This capital gain is taxed using the marginal rate of income tax that applies to you, plus social security contributions (cotisations sociales). The level of these latter charges is around 40%, making a potentially substantial tax charge.
Long-Term Gains
A long-term part comprises the difference between the purchase price and the sale price. This long-term capital gain is taxable at the rate of 12.8% and 17.2% for social charges giving a total charge of 30%. No social security contributions are payable.
Exemption
As punitive as this may seem, provided your turnover has averaged no more than €90,000 (€250,000 for chambre d'hotes) each year over the previous 2 years, the total gain (both short and long-term), is exempt from CGT and social charges. Nevertheless, social security contributions at around 40% remain payable on the short-term gain.
Depreciation
There are particular rules concerning depreciation where the régime réel is used:
Thus, for an apartment rented furnished, acquired for €100,000 from which €10,000 of depreciation has been deducted over the years of rental and which is resold for €120,000. The calculation differs for non-professionals and professionals, as follows:
– depreciation will be deducted from the rental income when it is carried out on a non-professional basis but will not be reinstated when calculating the capital gain on sale. The taxpayer will be taxed on 120,000-100,000 = €20,000;
– depreciation will be deducted from the income from the rental when it is carried out on a professional basis but will be reinstated when calculating the capital gain on the sale. The taxpayer will be taxed on 120,000-(100,000-10,000) = €30,000.
The depreciation of furnished rentals is increasingly under scrutiny by the government and may well change.
Conclusion
Although, therefore, LMP status confers a partial exemption from charges after 5 years of ownership, a far shorter period than for an LMNP for property sold under this period, the tax benefit of LMP status is far from evident.
In neither case is the tax regime particularly generous. For an LMNP no allowances kicks in until 6 years of ownership, and although LMPs benefit from depreciation, taxes are merely deferred as they are paid on sale of the property.
Note also that on the sale of an LMP property under two years of ownership the taxes imposed on the gain are very substantial, comprising both CGT and social security contributions.
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