Tax relief on real estate sales in France: proposed changes seek to boost market volume

President Hollande has made good on his promise to pull back on the dramatic increases in taxes imposed on property sales in France over the last two years.  In releasing the details of the new plan, Budget Minister Bernard Cazeneuve cited the “perverse effects of the current system,” specifically the significant decrease in the volume of sales since changes in the law were realized in 2012.  The changes are important, and set to be implemented as of September 1, 2013.

How it stands today:

The sale of a primary residence in France is now, and will remain, exempt from any tax.

The capital gains tax rate imposed on the gains from the sale of other residential real estate in France depends upon the seller’s fiscal residence: 19% for French and other EU residents, 33.33% for non-EU residents of “cooperative” countries.  As of September 2012, all sellers pay the 15.5% social charges on the sale.  Before 2012, only French residents were required to make those social contributions.

Until 2011, the amount of capital gain upon which taxes (capital gains tax and social charges) were imposed was reduced by 10% annually starting after 6 years of ownership. Thus, after 15 years of ownership, all gains on the sale of a second-home residential property were fully exempt from tax.

At the beginning of 2012, the reduction schedule was extended from 15 to 30 years, with the bulk of the relief (48% of it) coming after year 25.  For many real estate owners, the change was so drastic that they delayed their selling plans. Volume of sales decreased sharply during the last couple of years, a situation that Hollande’s government is hoping will be corrected with this new change.

What will change as of September 1^st:

The new plan separates capital gains tax and social charges with respect to the annual relief schedule:

For capital gains, the relief schedule is shortened to 22 years, and the annual reduction percentage is evened out: 6% per year for years 6 through 21, and the remaining 4% after 22 years of ownership.

For social charges, the 30-year reduction schedule remains, and the relief is even more weighted to the last years of ownership than before.  In the first 22 years, the annual reduction is only 1.65%; 72% of the relief is granted between years 23 and 30.

Exceptional 25% tax reduction for sales realized over the next year:

In an effort to really jumpstart the market, the new law includes an exceptional 25% reduction of the taxable gain (total capital gain less the abatement based on number of years of ownership) on any sale finalized between September 1, 2013 and August 31, 2014.  In other words, instead of paying taxes and social charges on 100 % of the taxable capital gain, sellers will pay on 75 % of it only.  The applicable rate, determined by country of residence, will remain the same.

How capital gain is calculated on the sale of property in Paris:

The capital gain realized on the sale is calculated by first subtracting the purchase price from the selling price. That amount is then reduced by certain expenses, including fees paid to licensed real estate agents at the time of purchase or sale, fees due to the notaire (French notary who handles the transaction) as well as government fees and taxes paid by the seller when he purchased, certain renovation and improvement expenses, or furniture included in the sale.  After 5 years of ownership, a seller can either itemize actual renovation expenses, or add a set 15% of the purchase price to the basis of the property to account for improvements made to the property, even if no improvements have been made.  For buyers, it’s important to keep all receipts of expenses from the time of purchase on, in order to minimize the tax paid upon sale.

The new law is a smart change, and a needed demonstration that Hollande’s government is able to respond effectively to the reality on the ground in order to boost the economy.  It’s also good news for both sellers and buyers, as many of the properties that have been held off the market since the law changed in 2012 will now come up for sale, broadening the offer considerably.

Sellers and buyers, on your marks, get set …