Selling real estate in Paris? 20% capital gains tax reduction proposed by French government for 2013

In response to the stark reduction in the volume of real estate sales nationwide and the resulting loss in capital gains tax revenue, President Hollande proposed to reduce the capital gains tax on real estate sales – for a limited time. Real estate sold during the 2013 calendar year will be subject to a 20% reduction in the applicable capital gains tax rate. “This exceptional measure will be maintained for one year, to encourage owners to more easily separate from their property,”confirms the office of Housing Minister, Cécile Duflot. Primary residences remain wholly exempt from capital gains tax in France.

For French and EU residents, the base rate of capital gains on real estate sold is 19% tax, for non-EU residents, the base rate is 33.33%.  As of August this year, all sellers now pay social security contributions of 15.5%; the resulting effective rates are 34.5% for French and EU, and almost 49% for non-EU second homeowners. Prior to that, only French residents paid the social security contributions on real estate sales. 

These rates are subject to a reduction schedule based on the number of years of ownership. The full rate applies for the first five years. The applicable rate is then reduced by 2% per year between the 6th and 17th year of ownership; 4% per year between the 18th and 24th year; and finally 8% annually after 24 years. Property owned for 30+ years is fully exempt from capital gains tax in France.

During 2013 only, these rates will be subject to the 20% reduction. Specifically, an owner selling his second home after six years of ownership would then benefit from a reduction of 22% (20% + 2%); after seven years of ownership, 24% (20 + 2 + 2 = 24). And persons holding property for at least 28 years will be de facto exempt.

For non-French residents, the proposed change will in part offset the increase in their tax burden on real estates sales since their rates went up 15.5% this past August. More broadly, the change was a welcome inclusion in a fiscal law that otherwise proposes substantial increases in tax burdens, particularly on France’s wealthiest individuals. Some of the other features of the proposed law:

* Two levels of income tax: 45% for income earned above €150,000 and 75% tax for income earned over €1 million. The latter will last only for two years. Currently, the highest tax bracket is 41% for income earned above €70,000.

* Increases in taxes on investments – such as stock dividends and real estate – to bring them in line with the taxes levied on salaries.

* An end to certain tax deductions for companies, such as interest payments on loans.

– An increase in the wealth tax for persons with assets over €1.3 million.

– An increase in taxes on company profits distributed to shareholders, with a tax break for profits that are reinvested.

The law is set to be voted on later this year.