Land Deficit

The property deficit or how to have your tax base melt

Do you earn rental income without really enjoying it because you have to pay more taxes and social security contributions? Take these revenues away from taxes thanks to the property deficit: you invest in older buildings, your taxes pay for the works and vice versa!

The principle: a property deficit is generated when the tax-deductible expenses of a real estate investment are higher than the property income received. Attention: only expenses related to maintenance, repair, improvement or renovation works are deductible (construction and expansion expenses are excluded).

Such a deficit can then be charged to the taxable income of the lessor owner (individual or company subject to income tax), within certain limits and under certain conditions.


 

Who can benefit from it?

  • Taxpayers who benefit from property revenues and who will be able to renovate their assets and reduce their taxable income.
  • Taxpayers heavily taxed on income who can use the deductibility of property income from their overall income within the allowed limits.


Deduction and limits: the deficit is first imputed to other property income earned by the taxpayer - no limit amount, then to the total income up to 10,700 € per year (of the year when works are completed). The fraction of the deficit exceeding € 10,700 or resulting from borrowing interest (including incidental expenses and insurance) is exclusively attributable to property income for the following 10 years. This surplus can not increase the property deficits of subsequent years attributable to the global income. On the other hand, if the overall income of the taxpayer is insufficient to absorb the imputable land deficit (limited to € 10,700), an overall deficit is created and is imputable in the general law conditions on the overall income of the six following years.


 

The allocation of the land deficit on land income decreases both income tax and social security contributions. In the case of a reduction in taxable income, and not a tax reduction, the property deficit benefits the most heavily taxed taxpayers.


 

Since 1 January 2013, tax cuts and tax credits have been capped at € 10,000 per household per year. This is known as the cap on tax loopholes. The deduction of the land deficit on the property income, then on the global income in the limit of 10.700 €, is not counted as a reduction of tax, nor as a tax credit. It does not therefore reduce the quota of € 10,000 of maximum tax reduction per year.


 

Details: beyond the elements already mentioned above, it should be noted that the benefits of the property deficit are granted in return for the rental of the property concerned. It must be rented unfurnished for at least 3 years from December 31st following the year of allocation of the property deficit. Failure to comply with this commitment would result in the loss of the tax benefit.


 

In addition, the land deficit mechanism does not apply to the 'micro-land' system. The 'micro-land' system is reserved for taxpayers realizing less than € 15,000 in rental revenue per year. It allows to benefit from a deduction of 30% on rental income, supposed to represent all expenses. This regime is simple but involves giving up the benefit of the property deficit scheme.

Malraux law

 A SOLUTION FOR HIGHLY IMPOSED TAXPAYERS 

The Malraux device allows to benefit from a 30% tax reduction on the renovation of a building. Its goal is to protect real estate heritage by encouraging the renovation of old buildings. In 2018, the scheme was extended to 53 districts of the new National Urban Renewal Program (NPNRU).
Since 1962, the Malraux law aims to help the owners to protect the private cultural patrimony, by proposing a tax reduction on the works undertaken for the restoration of old buildings. This system applies to remarkable sites since 1977, to old degraded neighborhoods since 2009, and to 53 neighborhoods of the new national urban renewal program since 2018.


 

The objectives of the Malraux device:

  • Fight against unworthy habitat
  • Revitalize old neighborhoods
  • Promote a diversified and quality offer of rental housing
  • Encouraging private investment in priority neighborhoods of city politics


A tax advantage of 30%

The tax reduction is based on the amount spent on the works undertaken for the rehabilitation. It allows to benefit from a tax advantage of 30%, up to 400.000 € spent on works for 4 consecutive years, at most.

For 100.000 € of works per year, during 4 years > the reduction of taxes will be 120.000 €.


 

Expenditures for works eligible for the Malraux scheme are those paid until 31 December 2019.

Historic Monuments law

Owners of property protected as historic monuments, approved by the Ministère des Finances or certified by the Patrimony Foundation may, under certain conditions, benefit from income tax reductions and deductions from the value added tax for the sums they spend on the conservation of their building.


 

DEDUCTIONS RELATED TO INCOME TAX

The share of the cost of the works at the expense of the owner on a building listed as historical monuments, approved or labeled is 100% deductible of income subject to income tax (no limit amount) when the monument is open to the visit.

When the monument is not open for the visit, the deduction will be 100% of the part remaining the responsibility of the owner only if the work is subsidized by the State (50% if the work is not subsidized by the state).

Other expenses (management fees, guards' remuneration, improvement expenses, interest on debt incurred for the conservation of the monument) are 100% deductible if the monument is open to visitors, 50% otherwise.


 

Deducting these expenses from your income allows you to realize spectacular tax savings because it is limitless! This is the solution to enjoy your high income without bending under the weight of taxation. With more than 100 years of existence, this law is not only the oldest, it is also the most powerful instrument of tax exemption.

A double interest: the State sees the means to renovate and protect properties classified as historical monuments; Investors gain the opportunity to acquire exceptional properties while erasing exceptional income, thus considerably reducing their tax burden.


This system is supplemented by an exemption from transfer duties for owners opening their monument to the public. Classified movable objects also benefit from a specific tax regime. The Finance Act for 2009 tightened the conditions for access to the tax system for owners of buildings classified or registered as historic monuments, approved or labeled: they must, in order to benefit from it, retain their building for a period 15 years old minimum. In addition, buildings held by a real estate company not subject to corporate tax and buildings to be divided in their interior spaces will have to be approved by the Ministry of Budget after consulting the Ministry of Culture for access to the specific tax regime.

Denormandie scheme

Voted in the framework of the Finance Act for 2019, the Denormandie scheme is a rental investment scheme designed to encourage renovation in the older real estate. It takes the form of an income tax reduction granted to individuals buying a home to renovate in a degraded old neighborhood for further renting.

The objective is to accelerate the renovation of housing in poor condition to meet the housing needs of the population, in line with the national plan to fight against unhealthy housing.

The Denormandie scheme is limited to the cities benefiting from the national program 'Action coeur de ville'. This plan refers to a five-year revitalization agreement between the state and 222 medium-sized cities to revitalize their downtown core.


 

To be eligible for the Denormandie tax reduction, you must:

  • buy a property to renovate in one of the cities labeled "Coeur de ville" between January 1, 2019 and December 31, 2021,
  • perform works representing at least 25% of the price of the housing purchased (works improving energy performance by at least 30% and carried out by an RGE certified professional or at least 2 of the following 5 works: boiler change, attic insulation, insulation walls, change of hot water production, window insulation),
  • rent your home for at least 6 years,
  • rent your home within certain ceilings of rents and resources (same as for the Pinel).


The calculation of the Denormandie tax reduction is based on the net cost of housing (limited to € 300,000). This price includes all the sums released to acquire the property including renovation expenses. The tax benefit is spread over the rental period:

  • for a lease period of 6 years: tax reduction of 12% of the net cost price,
  • for a rental period of 9 years: tax reduction of 18% of the net cost price,
  • for a rental period of 12 years: tax reduction of 21% of the net cost price.

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