Is it possible to reduce or avoid your French real estate wealth tax?
It is worth noting that since January 1, 2018, the wealth tax (Impôt de solidarité sur la fortune – ISF) has been abolished and replaced by a “new” tax known as the Impôt sur la Fortune Immobilière (IFI).
This contribution was created for individuals holding a net taxable real estate wealth of more than €1.3 million on January 1 of each year. This “other” tax broadens the scope of the French wealth tax which now mainly includes real estate assets.
In this article, we will explain the details of the IFI and share our experience on how to reduce your tax burden.
History of the French Wealth Tax:
The wealth tax has been around since 1981 and has been revised and corrected since then, as political agendas change:
1988 – Creation of the Impôt de Solidarité sur la Fortune (ISF).
2011 – Significant reduction of the ISF under N. Sarkozy
2012 – Reduction immediately cancelled by F. Hollande
2018 – Abolition of the ISF in favor of the Impôt sur la fortune Immobilière (IFI) by Emmanuel Macron.
Today, the IFI applies to individuals with real estate assets in France worth more than €1,300,000.
Financial planning is essential in the face of this tax, as proactive solutions can help you reduce its burden and optimize your wealth.
What assets are subject to the French wealth tax?
The IFI is calculated by taking into account your net taxable real estate assets as of January 1st of year N.
The taxable assets are in particular
- Houses, apartments and their outbuildings (garages, parking lots, cellars) for personal use or rental.
- Buildings classified as historical monuments.
- Buildings under construction.
- Non-built buildings such as building land, agricultural land, etc…
- Buildings or parts of buildings held indirectly through company shares.
- Property and real estate rights that do not meet the conditions for being considered as professional property.
Some properties are exempt, such as professional properties, woods and forests, rural properties rented on a long-term basis, etc…
The value of your principal residence will benefit from a flat-rate deduction of 30%, provided that it is not held through a management SCI.
For non-residents, this tax is only due on property physically held in France. Although the 183-day rule is generally considered to determine your tax residence, it is not always straightforward and non-residents should be careful, as residence is defined by French law.
Partial exemption –
After you move to France, you will be exempt from this tax for 5 years on your assets located outside France.
The tax on real estate wealth begins to apply to people whose net assets exceed €1,300,000 and is assessed on January 1st of each year. To calculate the French IFI, you need to add up the total value of your household assets and deduct all outstanding debts and overdrafts.
The following scale applies:
Although the tax threshold is indeed 1.3 million euros, the calculation scale starts at 800,000 euros.
Fraction of the net taxable value of the assets Applicable rate (%)
not exceeding 800,000 euros 0%.
> 800,000 and <= 1,300,000 euros 0.50
> 1,300,000 and <= 2,570,000 euros 0.70
> 2,570,000 and <= 5,000,000 euros 1%
> 5,000,000 and <= 10,000,000 euros
5,000,000 and <= 10,000,000 euros 1.25%
> 10,000,000 euros 1.50%.
Mr. Oliver owns a villa in France worth 2.4 million euros.
In 2012, he paid 1,400 euros in Council Tax and 2,200 euros in Property Tax.
Net taxable wealth =
2 400 000 €- 1 400 – 2 200 = 2 396 400 €
Calculation of the theoretical IFI =
(1 300 000 – 800 000) x 0,5%
+ (2 396 400 – 1 300 000) x 0,7%
= 10 175 €
Recalculation of the net taxable assets = 2 396 400 – 10 175 = 2 386 225 euros
Final IFI calculation = 10 104 euros
How to reduce the tax on real estate wealth (IFI) ?
Optimization and implementation of proactive solutions are essential.
Do not overestimate the value of your property:
French residents can deduct 30% of the market value of their primary residence. Property that you use for business or professional purposes may be exempt if they meet the appropriate conditions.
Be smart and list all eligible taxes due at the end of the year as a liability in your net worth calculation.
75% INCOME TAX CAP (IFI CAP)
This cap works in the same way as the former “Bouclier fiscal” and ensures that the total of French and foreign taxes does not exceed 75% of your income. If the calculation results in a ratio higher than 75%, the French IFI can potentially be reduced to zero.
Dividing assets among your descendants is one of the most effective ways to reduce the IFI. When well organized, these arrangements can significantly reduce your wealth tax and, in some cases, help you avoid it altogether. If they are poorly organized, you may instead be subject to higher gift taxes, making the process unnecessary. It is important to consult an experienced tax advisor in order to plan this transaction effectively.
The French government is very cautious with respect to donations and will sanction any error or fraud.
In summary, while there are many strategies to help clients avoid or reduce wealth tax, each client is different.
Therefore, the only way to begin formulating the best strategy for you is to speak with an advisor.