Buying Property in France – A Practical Guide to the French Wealth Tax
By Sophia Mose:
French Property and Taxes
Traditionally, France did not have a reputation as a tax-efficient country for wealthy residents. In particular, the pre-2018 French wealth tax on worldwide net assets made headlines for chasing away celebrities such as Gerard Depardieu.
However, as of the 1st of January 2018, the ISF was transformed into the Impot sur la fortune immobilière (IFI). As of that date, only the net value of real estate assets and direct and indirect shares or interests in real estate and real estate companies held as of the 1st of January of each year, are subject to an annual wealth tax. The threshold, bands and tax rates remained the same as they were for the old wealth tax, the ISF.
For the well-off, this reform made France a significantly more attractive country to move (back) to.
How Does the French Wealth Tax Affect You?
Non-residents* with property in France were already only liable for a wealth tax on net real estate assets physically situated in France. Not much changed for them, other than the deductibility of debt, as explained below.
For newly-arrived tax residents in France, the existing five-year exemption for assets outside France continued to apply. This exemption only applies if the individual wasn’t domiciled in France during the five years before they became tax resident again.
EXAMPLE: French taxpayer X moves to Manhattan and buys an apartment. After three years he returns to France and keeps the NY apartment. The exemption on the foreign property would not apply to taxpayer X. If he returned after five years, it would apply for the full exemption period of five years.
After the five-year exemption from IFI tax on a property abroad, French tax residents will incur IFI on all their net real estate assets and direct and indirect real estate rights held in France and abroad. All subject to the thresholds and calculations explained below.
Deductibility of Debt
The IFI is calculated over the taxpayer’s real estate assets, net of debt and other exemptions. But only debt taken on for the purchase of the real estate or the maintenance and improvement of the real estate assets can be deducted from the value.
Previously, when buying a property in France at a price beyond the €1.3 million threshold, buyers would often take out an interest-only mortgage loan at the time of purchase. They did this in order to reduce the equity in the property by the principal amount of the loan for the entire duration of the loan. Thus, they could minimize the amount of wealth tax, or avoid paying it altogether, for the entire duration of the loan.
As of January 1, 2018, the following changes were introduced:
- For mortgage loans that are “interest only,” the loan amount will be amortized over the period of the loan, notwithstanding it being an interest-only loan. This means that the outstanding amount of an interest-only loan with a ten-year term will be deemed to amortize each year by 10%. For a 20-year loan, the principal loan amount will decrease by 5% each year.
- If the market value of a taxpayer’s real estate assets is more than 5 million euros, debt that exceeds 60% of the market value of such real estate assets is only deductible for 50% of the debt amount.
- A loan issued by an entity that is directly or indirectly controlled by the taxpayer or their nearest family members cannot be deducted from the property value.
- Loans issued directly or indirectly by an ascendant, descendant, brother or sister are no longer deductible, except if the loan has normal market interest rates and conditions.
Calculating your IFI Tax Liability
French wealth tax only kicks in at net assets ≥ €1.3 million. Assets must be consolidated for all members of the household and couples must make a joint declaration, whether married or not. Finally, assets held by children younger than 18 must be included.
- There is a 30% discount on the market value of the main residence.
- The premises used for the taxpayer’s main professional activity are exempt. This also applies to property used for furnished rental activity, provided that the landlord is a registered professional landlord (LMP).
- There is a 75% exemption on the value of woodland.
- Taxe foncière (property tax payable by all owners in France) is deductible from the value of the relevant property.
IFI RATES **
|Tranche of taxable assets||Applicable Tax rate|
|> 800 000 € and ≤ 1 300 000 €||0,50 %|
|> 1 300 000 € and ≤ 2 570 000 €||0,70 %|
|> 2 570 000 € and ≤ 5 000 000 €||1.0 %|
|> 5 000 000 € and ≤ 10 000 000 €||1.25 %|
|Above 10 000 000 €||1.50 %|
Couple A bought a holiday property near Nice for €2 million (net of agency fees) in September 2017, with a €1.6 million 10-year interest-only mortgage loan from a French bank. They undertake extensive renovations in early 2018, for which they do not take out a loan. This house is their only property in France.
What was their IFI tax liability in May 2018?
- What matters is the value of the property as of the 1st of January 2018. Since the purchase was recent, the couple could take the purchase price of 2 million as the value of the property on January 1st. The renovations could not be taken into account until the tax filing of May 2019, with a valuation of the property as of January 1st of the following year (2019).
- The mortgage loan principal of €1.6 million was not yet amortized and could be deducted in its entirety. This left a net amount of €400 000 euros in assets.
Conclusion: for 2018, Couple A did not have any IFI liability.
Fast forward to the hypothetical 2023 IFI tax filing of Couple A.
- After renovations and property price increases, the property is valued at €3.3 million as of January 1, 2023.
- The loan principal is amortized over five years and can only be deducted for 50% of the principal, i.e. €800K.
- The net value of the property for IFI calculations is €2.5 million (the yearly tax foncière is deductible from the value, but we’re leaving that out of this example).
What is Couple A’s IFI tax liability for May or June 2023, assuming the tax rates and bands will remain the same?
|TAXABLE ASSETS IN €||APPLICABLE TAX RATE||TAX PAYABLE IN €|
|> 800 000 and ≤ 1 300 000||0,50 % x €500K||2 500|
|> 1 300 000 and ≤ 2 500 000||0,70 % x €1.2 M||8 400|
|Total tax payable for 2023:||10 900|
How to Determine a Property’s Market Value?
The taxpayer must determine the market value of a property as of the 1st of January of the relevant year. Deadlines for the tax return filing on Form 2042 are the same as for the French income tax return (June).
The taxpayer can ask for an evaluation of the market price by a notaire, a licensed real estate agent (agent immobilier), or an evaluation expert. In larger towns and cities, they can also check the government’s database ETALAB (see HERE) and other online tools such as Meilleurs Agents, PAP and the property price database of the notaires.
For rural properties, it is much harder to establish an accurate valuation, due to the absence of accurate comparables. With such properties, it’s a good idea to get the opinion of two or more local agents. When the property is below average quality for its region and type in the sense of features, interior and surroundings, you may adjust downwards from the average price. Vice versa, if the property, for instance, has a stunning view, has undergone recent renovations, or has above-average period features, you must reflect these factors in the valuation.
Once you have the valuation for a specific year, and provided that nothing major takes place that would increase or decrease the market value, you should increase or decrease the value each year in accordance with the publicly available property price data.
What Are the Penalties?
Because the French wealth tax is based on subjective evaluations of real estate assets, taxpayers might be tempted to undervalue the property. However, the French tax authorities have a toolbox of penalties to address wealth tax evasion.
- If you pay the correct amount but are late, or if the authorities decide that you’ve undervalued your assets, the initial penalty is 10% of the actual tax due. Each consecutive month of delay incurs a 0.20% penalty. If the absence of a filing persists, the (additional) they can increase the taxes due by a maximum of 40%.
- In more extreme cases, the authorities also can impose an estimated tax assessment.
* “Residency” is defined by French law and is not simply a matter of being in France for more than 183 days.
** These rates are subject to change
NB: This guide is for general information only and is not intended to be legal or tax advice.
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