You own a property in France and are considering renting it out. As a US tax resident, you are wondering how this income will be taxed. Do you have to report this income in France or the United States? Is there a risk of double taxation? All the answers to your questions are in this article!
A question of tax territoriality
France and the United States have signed a tax treaty to organize and define the taxation of income received by their residents. With regard to income from immovable property, Article 6 of the Convention specifies: “Income from immovable property (including income from agricultural or forestry operations) situated in a Contracting State may be taxed in that State“. Thus, income from buildings located in France is taxable in France.
Under French domestic law, Article 4A of the General Tax Code also specifies in this respect:”[Persons] whose domicile is outside France are liable to this tax solely on the basis of their income from French sources. »
Determination of taxable income in France
A distinction should be made between income from the rental of bare premises and the rental of furnished premises.
Bare rentals (without furniture)
Bare rentals fall into the category of land income. For the determination of taxable income, there are two schemes:
– The micro scheme: if the annual amount of revenue does not exceed €15,000 per tax household, the taxable result will be determined after deduction of a flat-rate allowance of 30%.
Example: Mr. Smith, an American resident, rents an unfurnished apartment in Paris, France. This rental brings him €8,000 in rent per year. Its taxable income is determined as follows:
8,000 – 30% discount = 5,600 €
His income tax will be calculated on a basis of €5,600
– The regime réel: if the annual amount of rents exceeds €15,000 per tax household, the taxable income is determined by deducting property taxes for their actual amount. This regime is also available on option if it is more favourable to the owner.
Here is the list of deductible expenses: administration and management fees (management fees, building security fees, etc.), insurance premiums, repair, maintenance or improvement work on the leased property, property tax, condominium fees, loan interest.
Mr Smith, whose apartment pays €8,000 in rents per year, is considering voluntarily opting for the real land regime. Here are the details of his charges:
- Management fees: 500 €
- Insurance premium: 150 €
- Property tax: 800 €
- Renovation work on the bathroom of the apartment: 2.600 €
- Internet subscription: 300 €
His taxable income is determined as follows: 8,000 – (500+150+800+2,600) = €3,950 The charge corresponding to the Internet subscription is not deductible.
In Mr. Smith’s case, it is indeed more interesting to voluntarily opt for the actual plan because the amount of his annual expenses represents more than 30% of his rents.
Unlike bare rents, which fall under the category of land income, furnished rentals are considered as commercial income. This category also includes two micro and real tax regimes:
– The micro scheme: it is applicable if the amount of annual revenue is less than €70,000. The taxable result is determined after deduction of a 50% allowance.
For furnished tourist rentals, the allowance can be increased to 71% if the owner requests the classification of his property (see our article on the subject: ……)
– Example: Mrs Williams owns a beautiful apartment in Cannes that she rents to tourists in the summer. This apartment brings him 20,000 € of rents per year. In order to benefit from a 71% allowance for charges, she requested the classification of her accommodation.
The taxable result is determined as follows:
20,000 € – 71% discount = 5,800 €.
His income tax will be calculated on a basis of €5,800.
– The real regime: it is mandatory when the annual rents exceed 70,000 €. It is also possible to apply it on option, if it is favourable to the owner.
There is no exhaustive list of expenses deductible under this system because any expense incurred in the direct interest of the activity and supported by supporting documents (invoices) is deductible: water/electricity/heating consumption, various maintenance, Internet and telephone subscriptions, insurance, co-ownership charges, property tax, loan interest, depreciation of real estate and furniture, etc….
The option for this scheme is therefore particularly attractive and the taxable result is generally very low or zero. However, it entails more restrictive administrative formalities for the owner since it is necessary to draw up, each year, an accounting balance sheet (commercial activity).
Calculation of income tax and social security contributions CSG CRDS
The taxable result, determined in accordance with the procedures set out above, is carried forward to the income tax return in May of the following year. Example: if rental income is received in 2019, return of this income in May 2020.
Non-residents are subject to a minimum tax rate:
|Net taxable income « per share »||Minimum tax rate|
|From 0 to 27.519 €||20%|
|Fraction greater than 27.519 €||30%|
In France, the calculation of income tax is based on the family quotient mechanism. For the purposes of the above scale, the net taxable income is to be divided by the number of shares representing the family quotient:
– a single, divorced or widowed person records a share;
– a married or married couple accounts for 2 shares;
– a married couple with one child has 2.5 shares (the first two children each have ½ shares).
The final tax is obtained by multiplying the tax determined “per unit” by the number of shares of the family quotient.
In France, both asset and rental income are also subject to CSG CRDS social security contributions of 17.2%.
Thus, the minimum tax rate for non-residents is 20% + 17.2% or 37.2%.
Example: Let us take again the case of Mrs Williams, an American resident, who receives income from the furnished tourist rental of an apartment located in Cannes. Under the micro scheme, his net taxable income amounts to €5,800.
His tax will be calculated as follows: 5,800 € x (20% + 17.2%) = 2,158 €.
What about the U.S. tax return?
Persons domiciled in the United States for tax purposes and American citizens are subject to unlimited tax liability and must report all their worldwide income on their American tax return. Real estate income from French sources does not derogate from this rule. The taxable income is determined in accordance with the American tax rules specific to the nature of this income.
In accordance with Article 24 of the tax treaty signed between France and the United States, double taxation will be avoided by charging a tax credit equal to the amount of tax paid in France.
Until very recently, the American tax administration refused to recognize the tax character of the CSG CRDS paid in France by American citizens and residents (17.2% rate). Thus, only part of the tax paid in France was actually deducted. Finally, on June 14, following a trial between the American tax administration and a Franco-American couple, the Washington Tax Court finally allowed the CSG CRDS to be deducted. The IRS has announced a forthcoming update of its notices.