TAXATION ON RENTAL PROPERTIES

The taxation of your rental property can have an important impact on your property investment strategy.

UNFURNISHED

Rentals

The income perceived from an empty rental property (unfurnished) is declared as revenus fonciers. In this type of rental income, you have two possible regimes: micro-foncier and foncier réel.

Micro-foncier

This is ideal for small revenues. To stay on the micro- foncier regime, the total rent perceived must not exceed 15 000 € / per annum.

For this calculation, we need to include all rental received during the year (Jan-Dec). This includes equally:

▪ Exceptional payments: insurance compensation of unpaid rent

▪ Accessory rent: for example, advertising board rental.

Within the micro-foncier regime, you need to declare the rent hors charges locatives in order to benefit from the 30% exoneration. Tax is applied therefore to 70% of the rent. For example, if you have received 10 000€ of rent hors charge, taxation is applied to 70% of this sum i.e. 7 000€. This is particularly interesting if you have low running costs.

Hors Charges

The charges locatives are paid on top of the rent. They are to cover the cost of certain maintenance.

The tenant is responsible for the maintenance of and small repairs to the rental property. Therefore, if the washer in a tap needs replacing then this is at the tenant’s cost. If the tap however needs replacing, then it is at the owner’s cost. This is mainly for properties where there are shared areas, such as in a block of flats, e.g. for the maintenance of a lift. If the property is a simple house, there are no shared areas, so the only cost that can be passed onto the tenant is possibly the dustbin bill.

Réel foncier

Unlike the micro-foncier régime, réel foncier permits the calculation of a real profit. It allows for certain costs to be deducted from the annual rent, in order to reflect the real gain.

You can therefore deduct, before tax, the following expenses, without limitation:

▪ The costs of repairs and maintenance

▪ The cost of management, administrative, and legal fees

▪ The insurance

▪ Taxe foncière

▪ Mortgage interest

However, you can not deduct any of the cost of the property purchase or the fees.

For example, if you have received 10 000€ rent, and have spent 2050€ (1150€ on maintenance work, 400€ on taxe foncière, 100€ in insurance and 400€ on management fees),

Your taxable rental income will be 10 000€ – 2 050€ = 7 950€.

One of the advantages with this régime is that you can carry forward losses.

If, for example, you make a loss in your first year due to expensive improvements, then the loss can be deducted from next year’s net rental income.

If you receive less than 15 000€ annual rental, it is imperative to calculate which régime is more advantageous to you.

Taxes

All rental income is subject to two taxes in France; income tax and social tax. Income tax is defined by your family situation and includes other incomes. Social tax is applied at 17.2% of the net taxable rental income. In terms of accounting, this is just part of your personal tax return. You can change from one régime to the other every two years.

Furnished Rentals

The income perceived from a furnished rental property is declared as revenus de locations meublées non-professionnels. The rent perceived from this must be lower than other forms of household income (salaries, pensions etc..). With this type of rental income, you also have two possible regimes: micro and réel. You must register for a siret number with the tax office for these types of income.

Micro Non-Professionnel

Again, this is ideal for projects where the real costs are lower than the tax allowance. To stay on the micro non-professionnel régime, the total rent perceived must not exceed 23 000 € / per annum. For this calculation, we need to include all rental received during the year (Jan-Dec). This includes again;

▪ Exceptional payments: insurance compensation of unpaid rent

▪ Accessory rent: for example advertising board rental.

Within the micro non-professionnel regime, you need to declare the rent hors charges locatives in order to benefit from the 50% exoneration. Tax is applied therefore to 50% of the rent. For example, if you have received 10 000€ of rent hors charge, taxation is applied to 50% of this sum i.e. 5 000€. If your rental is less than 305€ par annum, then you do not pay tax.

Réel Non-Professionnel

Unlike the micro-régime, réel régime permits the calculation of a real profit. This version of réel allows for a wider range of costs to be deducted from the annual rent. The big difference between this and the réel foncier is that you can include the purchase of the property and the fees related to the purchase. The accounting for this is run like a business and we separate costs into annual expenses and depreciable assets. This means that certain costs, that we call assets, are spread over their ‘life span’.

For example, if you paid 100 000€ for the purchase of the property under fiscal rules, we would depreciate the cost over 15 years. This means that 6 667€ would be deducted as an expense every year, thus reducing your net taxable income. You also have the option on this régime to be TVA registered.

Taxes

As above, all rental income is subject to two taxes; income tax and social tax. Income tax being defined by your family situation and other incomes and social tax being applied at 17.2% of the net taxable rental income. There is a lower rate of tax for S1 holders from 17.2% social taxes to 7.5%. In terms of accounting, it varies as to whether you have chosen the micro or the réel option. If you have chosen the micro, this continues to be just part of your personal tax return. However, if you have chosen the réel régime, then you are required to keep full accounts, complete a professional tax return as well as including this on your personal tax return. Depending on the area your property is situated in, you may be subject to business premises tax (CFE). You can change from one regime to the other every two years.

Other structures

The structures mentioned above are for the personal ownership of a property. You can also create a property company, this is called a Société Civile Immobilière (SCI). There are advantages to this, especially for inheritance or group ownership. It is however more complicated and therefore expensive to run. Talk to your accountant about this. Unlike in the UK, holiday rentals are grouped in with furnished rentals, this is a separate type of rental income. Always seek expert advice if you are unsure.

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