Taxation of luxury real estate must be taken into consideration to build up a sustainable wealth is through real estate, investing in luxury real estate is an even more certain way to increase it.
This is not without tax consequences, especially since the ownership of such property can lead to its owners being subject to the IFI. But this particular sector also allows, thanks to various schemes, to benefit from tax advantages. These can be applied up to the point of succession.
Taxation of luxury real estate : If the property is occupied by its owner
When prestigious real estate (private mansions, luxury villas or chalets, manor houses…) are occupied by their owners, their tax system is no exception to the rule. They are subject to the same taxes as ordinary real estate is. It is therefore necessary to pay the property tax and the housing tax. These taxes will be based on the rental value of the building, after weighting according to its equipment and its location.
In case of transfer of the building, again the ordinary rules apply. If the property is the actual main residence of its owner, any capital gain generated by the sale will be exempt. If it is a secondary residence, the abatements for length of ownership will apply: the income tax exemption will be acquired after a holding period of 22 years, while the exemption from social security contributions will be acquired after a holding period of 30 years.
Taxation of luxury real estate : If the property is rented out
In practice, the most interesting system for renting out luxury properties is the “Revenus Fonciers” scheme. This regime allows, for buildings often requiring important maintenance costs, to deduct from the generated rental income, all the expenses incurred during the year for the maintenance of the building: maintenance works, property taxes…
If the tax outcome is a profit, it will be added to the owner’s global income before being submitted to the progressive income tax scalecome tax scale. If it is a loss, this will be deductible from overall income up to €10,700. The part of this deficit corresponding to the loan interests and the excess part (beyond the 10 700 € threshold) can be deducted from the property income of the following ten years.
Specific tax measures for luxury real estate
The Malraux scheme: restoration and tax exemption
This scheme, created in 1962, aims to encourage the restoration of old historic properties. The (future) owners of such properties will be able to benefit from the advantages it generates if they proceed with the restoration of the property and commit to renting it for at least 9 years. The work will have to be supervised by an architect of the Bâtiments de France, and will concern the whole building.
The MALRAUX law allows you to benefit from a tax reduction of up to 30% of the cost of work aimed at maintaining or restoring the building in good condition (structural work, plumbing, electricity, repair, maintenance and improvement work, etc.). This benefit is calculated in proportion to the amount dedictaed to the renovation, up to a ceiling of 400 000 € over 4 consecutive years, or a reduction of 120 000 € over these same 4 years.
The rate will be 22% for housing located in a remarkable heritage site or in areas of architectural and heritage enhancement. It is 30% for buildings located in an outstanding heritage site covered by the perimeter of a plan for safeguarding and enhancing, or in a safeguarded area (old, degraded neighborhoods, neighborhood with a high concentration of old degraded housing).
The owner undertakes to rent the building out empty within 12 months following the end of the work. The property must be rented out as a principal residence for a minimum of 9 years. The tax reduction granted under the Malraux scheme is not taken into account for the calculation of the global ceiling on tax niches.
The law on Historic Monuments: protection of French real estate heritage
The purchase of a property classified as a Historic Monument or listed in the Supplementary Inventory of Historic Monuments allows its owner to defund a certain number of expenses. The maintenance and restoration expenses of the property, as well as the interest on the loan used for the acquisition of the property or its renovation, are deductible from the global income and/or the generated property income. Here again, the work must be supervised by an architect of the Bâtiments de France, or even obtain agreements from the Minister of Culture (division of the property).
The rate of deductibility varies from 50 to 100% depending on whether the property is occupied or not, rented or not, or whether it generates income. Whether or not the property is open to visitors (with or without a fee) also plays a role in the application of the system: if the property is not intended to be open to the public (or if it is not open to the public for at least 40 or 50 days per year), the deduction is limited to €200,000 per year.
There is no rental obligation. As regards the transfer of the sale, it benefits from an exemption from inheritance and gift taxes. These advantages can be applied to heirs belonging to the owner’s family as well as to those without family ties to him. They only apply to the part of the estate that concerns the property. In order to benefit from it, the heirs or donees will have to sign an agreement for an indefinite period and to have it validated by the Ministry of Culture.
The tax reduction granted under the law on Historic Monuments is not taken into account for the calculation of the global ceiling on tax niches.
Submission to the IFI
If the value of the property exceeds €1,300,000, or if the sum of its value with that of other property held by the taxpayer exceeds this same threshold, this triggers the liability to the IFI (French wealth tax). This tax will be applied progressively, in brackets, via a scale ranging from 0 to 1.5%. If the property is the taxpayer’s principal residence, he or she will benefit from a 30% deduction on its value.
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