Buying a property in France: Tax considerations

Whether you are looking to buy a piece of France to fulfil a dream or for investment purposes, you should consider seeking legal and tax advice from a French tax advisor to prevent any adverse tax consequences that may result from your investment. You will find hereafter a summary of the key elements to consider when buying a French property.

Buying a French property

In France, real estate can be acquired in different ways.

In your own name or through an entity?

A French property can be directly owned by an individual. It can also be owned through a French entity such as a société civile immobilière (French SCI), an entity incorporated in your home country, or via a trust, provided that certain conditions are met. No choice is better than another, but it is important to address the pros and cons of each option.

For example, if you intend to make your property available for short-term furnished rentals, a French SCI might not be the best option. Indeed, a French SCI is only supposed to perform civil activities while, under French tax law, the furnished rental of real estate is deemed to be a commercial activity.

Holding your French real estate via a foreign trust may also trigger reporting obligations in France. Indeed, trusts having a connection with France are subject to various reporting obligations in France. The purpose of these reporting obligations is to provide the French tax authorities with some information regarding the trust, the trustee(s), the settlor(s) and the beneficiaries of such trust.

If you are the trustee, the settlor, or the beneficiary of a trust holding a French property, and if you are unaware of the trusts’ reporting obligations in France, you should seek advice from your French tax advisor.

Finally, the use of a foreign entity could also be detrimental for tax purposes, as it may trigger unwanted tax consequences in France, such as the payment of French corporation tax. As you may understand, it is important to seek advice from a French tax advisor if you intend to buy a property, especially when using a French or foreign entity to do so.

What steps are involved?

The acquisition of a property can be summarized in a two step procedure.

First, after the seller and the buyer of the French property have agreed upon a sale price, a French sale agreement (“compromise de vente”) or a promise to sell (“promesse de vente”)  is signed by both parties.

Once this is done, a period of 2 to 3-months is provided to the buyer of the property to obtain the funds required for the acquisition of the French property. In the meantime, the notaries in charge of the sale of the property will make sure that the property can be freely sold at the price the buyer and seller agreed on.

Secondly, after the financing has been obtained and, if no issue has been identified by the notaries, a deed of sale (“acte authentique de vente”) is signed by both parties, and the keys to the property are transferred from the seller to the buyer, who becomes the owner of the property.

It is always helpful to have a French attorney review all the documentation prepared by the French notaries in charge of the sale of the property, especially if French is not your first language. Our team of French tax advisors can help you in this respect and represent you at each step of the buying process of your French property.

Is the acquisition subject to any taxes or fees in France?

The acquisition of a French property is, in most cases, subject to registration duties and notary fees at an overall rate of approximately 7,8% of the acquisition price.

However, in some cases, the acquisition can be subject to French VAT in lieu of registration duties. For example, this can be the case for new property developments.

Owning a French property

You have bought your French property and achieved a dream of yours, but now you are wondering if owning a property in France will trigger the payment of any taxes. Whether you intend to simply enjoy your property or start a rental activity, you will find hereafter a brief summary of the taxes that may be due in France.

If I start a rental activity, will my income be taxed in France?

If you intend to start a rental activity, your rental income will be subject to French income tax, at a progressive rate ranging from 0% to 45% and French social contributions at a rate of 17.2%.

The taxation of your income can however greatly vary depending on whether your property is rented furnished or not.

If your property is rented unfurnished, your taxable basis will be determined following the rules of the French real estate income regime (or “revenus fonciers”). If your property is rented furnished, your taxable basis will be determined following the industrial and commercial profits rules (or “bénéfices industriels et commerciaux”).

Both regimes have their own benefits and disadvantages. You should seek tax advice from your French tax advisor to determine whether it is best to have your French property rented furnished or unfurnished.

Do I need to pay taxes in respect of the ownership or occupation of the property?

As a general rule, real estate in France is subject to French local taxes. First is the French property tax (“taxes foncières”) which is due by the owner of the property. The second one is French housing tax (“taxe d’habitation”), which is due by the tenant of the property. If you occupy the property you own, you will be subject to both the property tax and the housing tax.

Owners of properties that are rented out furnished are also subject to French real estate business contributions (“cotisations foncières des entreprises”).

Will my property be subject to the French wealth tax on real estate?

Since January 1st, 2018, French tax residents are subject to the French wealth tax on real estate (or “impôt sur la fortune immobilière” – IFI) on properties (with some exceptions) they directly or indirectly (e.g., through an entity) own worldwide.

Non-French tax residents are also subject to this tax. However, in their case, the French wealth tax on real estate applies on the properties they directly or indirectly own in France only.

This tax applies if the net market value of your real estate exceeds € 1.3 million on January 1st. To determine the net market value on January 1st, loans borrowed to finance the acquisition or renovation works are deducted from the market value of your real estate, with some limitations.

Will my French property be subject to French inheritance tax upon my passing?

As a general rule, if, upon your passing, your French property is transferred to your children, its net market value will be subject to the French inheritance tax in France at a progressive rate ranging from 0% to 45% after application of a €100,000 allowance.

For non-French tax resident individuals, inheritance tax may apply whether the property is held directly or indirectly. This can be the case, for example, if the French property is held through a foreign entity which is deemed to be a real estate entity in France for French tax purposes.

If you are not a tax resident of France, the right for France to apply French inheritance tax to your French property could however be limited by the numerous tax treaties signed by France with other countries.

If my property is owned through an entity, will this entity be subject to any taxes?

If your property was acquired through an entity, whether French or foreign, this entity can be subject to the French 3% tax on real estate. This tax applies annually on the market value of properties held by entities on January 1st.

Provided that certain conditions are met, entities within the scope of the 3% tax on real estate tax can benefit from an exemption of this tax. This exemption is in most cases subject to the filing of a 3% tax return in France.

In addition, depending on the circumstances, your entity can also be subject to French corporation tax on the theoretical annual rental value of the French property it owns.

Therefore, if your French property was acquired through an entity, you should confirm with your French tax advisor whether your entity is up to date with its reporting obligations in France or not. Our team can of course help you in this respect.

Selling a French property

As a general rule, the sale of a French property by an individual triggers the application of the capital gains tax at a rate of 19% and the payment of social contributions at a rate of 17,2%. Capital gains exceeding €50,000 are also subject to an additional tax ranging from 2% to 6%.

Properties held for 22 years or more can be sold free from the French capital gains tax. Similarly, properties held for 30 years or more can be sold free from French social contributions.

The capital gain corresponds to the difference between the sale price and acquisition price. Provided that certain conditions are met, renovation works, and notary fees can be deducted from the capital gain. As a result, in certain circumstances, the capital gain can be nil.

If you intend to buy, manage, or sell a French property, feel free to contact our team of French tax advisors. We can help you at each step of the process. Our lawyers are based in France and have a long experience dealing with French taxes in an international context and can assist you with any query you may have in respect of your French property.