New French Tax proposals for 2013

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.