The French Senate has adopted an amendment to the 2013 French Tax law reducing the rate of the exceptional discount from 20% to 15% on the capital gains tax levied on the sale of a second home or a land to build in 2013.
Introduced by Senator Marc Francois, the amendment aims to help the government to avoid the loss of 285 million euro in tax revenue. According the amendment, the reduction in the allowance will moderate the cost to the French government of the property tax discount without undermining the incentive to boost the French property market.
Overseas buyers are still enjoying the best French mortgages rates for many years and with rates predicted to remain stable over the course of the next year, the future looks bright for those seeking to buy a property in France
2013 promises to be a good year for real estate investors in France. After seeing the tax reductions from the “Loi Scellier” diminish each year, the latest announcements and rumours spread around the future Finance Act 2013 suggest that the coming year will be particularly good for those who wish to invest in France as these tax breaks will support the market.
The renewal of the “Loi Girardin” for housing in the Dom Tom, the overseas departments and territories of France, will see the continuation of a tax deduction capped at 18,000 euros for investors fiscally resident in France. The “Loi Malraux”, for investors in Historic Monuments, will also be renewed under the same conditions. Finally, the “Loi Scellier”, which was so popular and helped keep transactions numbers up over the past 3 years, will be discarded in favour of a new law which will have a tax benefit capped at 10,000 euros.
As the majority of the existing tax laws will be maintained, investors will benefit from as many tax reductions in 2013 as 2012. The French government has decided to take a little more time to take the full measure of the housing market and levers at its disposal to stimulate the construction of social housing. The tax incentive to increase the sale of construction land, which was recently passed by the National Assembly, will lead to the creation of new housing in 24 to 48 months. The Hollande Government think it is necessary to maintain the current tax advantages for investment in property for rental until the increase in new property construction kicks in as more land is sold for construction.
In this tense economic climate, it is likely that 2013 will be the last year to take advantage of significant tax cuts on investment in private rental investment for those fiscally resident in France. The Duflot law should allow French investors to get an interesting net investment profitability despite the capped rents provided by the law. This activity will help to support the French property market and French property prices. For the international investor, France continues to offer an attractive mix of soft property prices and French mortgage options at extremely low rates.
Notice to all French property owners. Today is the last day to pay your French land tax. Payment to the tax administration must be done by midnight on Monday 15th of October. Those who wish to pay online can wait until Saturday 20th midnight before a penalty could be issued. If you are paying online for the first time, you need to have your tax assessment and bank account details ready as they will be required as well as your tax reference number and tax assessment number.
Note that the calculation of the French land tax is automatically done by the fiscal administration and doesn’t need any declaration except if landlords have proceeded to major changes such as building a new room.
French land tax (Taxe Foncière) increased by 21% nationally between 2006 and late 2011, three times faster than inflation and the rent price index.
Local Councils and Authorities increased Taxe Foncière, which is paid by the owners of a property and not by the tenants, by 21% nationally between 2006 and late 2011, three times faster than inflation, the rent price index or the revaluation of retirement pensions, according to a study of the National Union of Property Owners (UNPI).
The tax base for Taxe Foncière is the land rental value, which is the calculated annual rent estimation done by the Local Authority, which is the average market value less 50%. “Today, some owners are forced to pay almost the equivalent of an annual rent when you add up the various costs: Taxe Foncière (35% of the rental value which represents four months of rent), Taxe d’Habitation, VAT pay for the maintenance, etc… “Jean Perrin, president of the UNPI said.
Properties are easy to tax as they are assets that you cannot relocate. “Taxe d’Habitation weighs more on the household budget owners as it is paid by those renting a property from an owner, sometimes they represent up to the equivalent of three months rent, salary or pension,” says the UNPI, which represents small private landlords. At the end of 2011, the national average for Taxe Foncière reached 35.65% of average annual rent of a property as estimated by the local council (excluding additional fees for equipment and garbage collection).
The fast rise of the Taxe Foncière reflects the growing financial needs of local councils and authorities due to the recent decentralization and the decrease of income related to the drop in real estate transactions. “A Taxe d’Habitation increase is politically more difficult to announce, so we have increased the Taxe Foncière, which affects only the owners. In the past five years, Taxe Foncière has risen twice as fast as the Taxe d’Habitation.” Jean Perrin said.
On the 50 largest cities in France, Paris has known the highest Taxe Foncière increase between 2006 and the end of 2011 (+68%) due to the introduction of a city tax in 2009. In three other cities, this tax has increased by more than 30%: Argenteuil (+ 34.79%), Nantes (+ 30.64%) and Saint-Denis (+ 30.15%). However some cities have experienced five years of tax increases below average: Toulouse (+ 18.42%), Marseille (+ 15.34%), Lyon (+ 15.11%), Strasbourg and Bordeaux (14% each).
But the change must be compared with the existing tax rate. For instance, despite a moderate raise, the land tax rates of Nimes and Orleans are among the highest at the end of 2011 (respectively 52.9% and 45.6%). Even if the tax has jumped in Paris, it remains one of the lowest in France (13.5% at the end of 2011). The lowest rates are for property in Paris and its close suburbs.
The government presented the budget for 2013 last Friday. As expected, the taxation of real estate will be revised. Let’s have a look on the main reforms that will apply next year, subject to ratification.
A new rental investment tax system
The Scellier law is to be replaced by the Duflot law. From January 1st 2013, individuals who buy a new property for rent will benefit from a tax deduction equivalent to 18% of the amount invested in the limit of 300,000 euros. The tax deduction will be spread over nine years. To take advantage of the law Duflot, landlords will have to lower the amount of the rent of their flats by 20% compared to the average price of the market.
The new system will apply to homes situated in Zone A and Aa (Paris and its suburbs, a part of the French Riviera and the French Genevois, some cities located in Haute-Savoie, Var and Alpes-Maritimes), B1 (urban areas with over 250 000 inhabitants, Corsica, Paris suburbs, and the small towns). Cities in the B2 zone may also be included if they have more than 50,000 and less than 250,000 inhabitants, subject to the authorization of the local government prefects.
The goal set by the government is to generate the construction of 40,000 new homes in 2013.
Capital gains tax reduced
To generate a bigger turnover, taxes in capital gains (excluding principal residences that will remain exempt) will be temporarily reduced. A further discount of 20% on the CGT bill will be given to the owners who sell their property in 2013.
Currently, capital gains tax is 19% for the first five years of ownership to which social security contributions of 15.5% are added, making the effective tax rate 34.5%.
At the moment, the property owner receives a discount via taper relief of 2% per year between the sixth and the seventeenth year of ownership, followed by 4% per year after the seventeenth year, and finally 8% annually after twenty-four years which lead to a total exemption after 30 years.
In 2013, the 20% discount will be exceptionally added. For instance, an owner will now benefit from a reduction of 22% (20% + 2%) if he sells his second home after six years of ownership, 24% after 7 years and so on…
Higher taxes on building land
The French Government wishes to increase the number of house being built. Therefore, they plan to discourage investors from holding on to a piece of land to build on in areas where housing needs are the strongest by increasing taxes and discontinuing allowances.From January 1st 2013, the allowances on capital gains from the sale of a land to build on will be removed together with all the allowances acquired under the previous tax regimes.Only transactions with an agreement to sell signed before January 1st, 2013 and whose final signature is made before January 1st 2014 will continue to benefit from these allowances. If the law is passed without any changes, it should encourage owners to sell by the end of 2012. In all cases, capital gains will remain taxed next year at 19% (34, 5% with social contributions). However, this taxation will end on January 1st 2015. At that time, any capital gains will be taxed according to the scale of income tax (plus social contributions). If the law is passed in the current state, this will disadvantage the wealthiest who already pay the highest tax rate.
Tax on vacant properties spread out
The tax on vacant properties will be extended to cities of over 50,000 inhabitants (versus cities of 200,000 previously) where there is a significant difference between supply and the demand of rental properties.
The new tax will be applied to the properties left unoccupied for over a year. The rate will be 12.5% for first year and will increase to 25% for the next year of ownership. This tax is based on the rental value of the property and according to the government, this should bring 150 million euros in 2013 and 180 million in 2014.
A new method of calculation of Capital Gains Tax announced by French Prime Minister, Francois Fillon last week, which may well give rise to an increase in transactions and property speculation by both French and non-resident buyers of French property.
Previously French the CGT rate applied to any capital gains made on French property would have reduced by 10% annually after the fifth year of ownership until there was effectively a zero rate applied in year 15. This 10% reduction after year five has now been scrapped in favor of an alternative calculation which instead allows sellers of French property to deduct the official amount of inflation during the period of ownership from any capital gain before the flat rate of tax is applied.