French Rental Income: How Not to Pay Taxes?
The advantage of real estate investment over other types of investments, in addition to the yield, is its taxation. It is the only investment that can reduce or even eliminate taxes through various mechanisms. Depending on the type of property or rental mode, the method differs.
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Here are the explanations.
- How Not to Pay Taxes with a Furnished Rental?
- How Not to Pay Taxes in a Real Estate Company (SCI)?
- What Are the Tax Reduction Schemes to Avoid Paying Taxes?
Investing in rental properties, i.e., buying real estate to rent out and generate income, is one of the French’s favorite investments. It is a profitable investment whose performance can be enhanced by tax benefits. Although somewhat complex, the tax system offers the opportunity to reduce or even eliminate taxes on rental income (and possibly on personal income). Optimizing taxation is essential for any savvy investor to master.
Now before anything, there are two things you will pay on your net rental income: the income tax on that income (20% for most incomes) + a solidarity contribution to health and social services of 7.5% (French residents pay 30%). See below.
Taxation of Rental Income: What Tax Rate for Non-Residents?
For rental income generated in France, the deductions are the same for both French residents and non-residents. However, the difference lies in the calculation of the post-deduction tax.
As a British citizen who is a non-resident of France and owns a rented property in France, you will pay:
- A minimum average tax rate of 20% for French-sourced income up to €26,070.
- A tax rate of 30% for income above €26,070.
Social Contributions – Exemption from CSG and CRDS in Certain Cases
Social contributions (PS) apply to French-sourced real estate income received by individuals domiciled outside France.
Since the taxation of real estate income received in 2018 and taxable in 2019, individuals affiliated with a mandatory social security scheme other than the French one within an EEA country (European Union, Iceland, Norway, Liechtenstein) or Switzerland, are exempt from CSG (General Social Contribution) and CRDS (Social Debt Repayment Contribution). Although the United Kingdom left the European Union on January 1, 2021, UK residents continue to benefit from this exemption from CSG and CRDS.
However, these incomes remain subject to a solidarity levy of 7.5%.
- As a British resident, you will be able to deduct these amounts from the British tax to be paid on your holiday let income in France.
Act Now When Declaring Your Income in France
To ensure this exemption:
- Indicate the total amount of your rental income in box 4BA or 4BE on your tax return.
- Check the “divers” section of the online declaration to access box 8SH (for declarant 1) and/or 8SI (for declarant 2).
- Specify in box 8RF the amount of income exempt from CSG/CRDS if it is a married or PACS-civil-unioned couple and only one of the spouses meets the exemption conditions.
As a result, the contemporary installments to which you will be subject following the processing of your income declaration will be calculated without social contributions, with the 7.5% solidarity levy being collected at the balance of the tax payment.
French tax on property rentals for non-residents
How Not to Pay Taxes with a Furnished Holiday Let?
Furnished rental is now an especially attractive rental mode for investors. Higher rents than unfurnished rentals, high and varied rental demand (students, young professionals, tourists), and advantageous taxation explain this appeal. Yes, in terms of taxation, furnished rental significantly increases profitability.
Furnished rental, as the name suggests, involves renting an apartment (or house) that is furnished. The furniture and equipment you provide must meet strict regulatory requirements. You must adhere to a specific list of furniture or risk being reclassified as an unfurnished rental.
Furnished rental is divided into two statuses, the non-professional furnished rental landlord (LMNP) and the professional furnished rental landlord (LMP).
LMNP Regime
The LMNP regime is the most common among individual investors. You qualify if your rental income does not exceed €23,000 or 50% of your household income. Two tax regimes are available under the LMNP.
Micro-BIC Regime
Similar to the micro-foncier regime for unfurnished rental, the micro-BIC regime offers a flat-rate deduction of 50% on your rental income.
Example
Your furnished rental generates €12,000 in rental income per year.
12000 x 50/100 = €6,000
- Social security contributions: 6000 x 7.5/100 = €450
- Income tax: 6000 x 20/100 = €1,200
- Total taxable amount: €1,650
Real Regime
This tax regime is applicable if your rental income exceeds €70,000 per year or upon request to the tax administration. The real regime is more complex, but it is the most attractive, as it can reduce your rental income tax to zero. The real regime allows for the deduction of all expenses related to the rental (co-ownership charges, management fees, loan insurance, maintenance, property tax, etc.), as well as depreciation.
Depreciation is an accounting mechanism crucial for furnished rentals. Each year, you deduct the estimated loss of value of your equipment, furniture, and property from your rental income. This amount is added to the deducted rental expenses. If the result is negative, you can carry the sum over to the next year’s rental income.
Example
Your furnished rental generates €12,000 in rental income per year.
Annual expenses: €3,500 (co-ownership fees, property tax, insurance, management fees…) Depreciation: €7,000
- Total taxable rental income: 12000 – (3500 + 7000) = €1,500
- Social security contributions: 1500 x 7.5/100 = €112.50
- Income tax: 1500 x 20/100 = €300
- Total taxable amount: €412.50
Compare this total with the result under the micro-BIC regime to see the advantage of the real regime.
With the depreciation mechanism, the non-professional furnished rental landlord status under the real regime becomes extremely attractive for eliminating rental income tax. This is the status and regime most often recommended by Masteos. Although the tax return process is a bit longer and may require an accountant, it is well worth it.
Purchase taxes and costs to buy a property in the French Alps
How Not to Pay Taxes in a Real Estate Company (SCI)?
The real estate company (SCI) is a popular legal form for individuals to invest. The tax system is complex, but depending on the chosen form, it can be significantly reduced. With an SCI, you can decide whether your real estate investment is subject to income tax (IR) or corporate tax (IS).
SCI with Corporate Tax (IS)
The key point to remember is that as long as the profits from your real estate investment remain within the SCI, you do not pay tax on them. Partners only pay taxes if dividends are distributed. The rate is then 20%: 7.5% social security contributions and 20% income tax. The idea with an SCI under IS is to grow your assets without receiving income for many years.
However, the SCI is taxed as a company at a rate of 15% on its income if it is less than €38,200, and 26.5% if it is higher. As with a classic real estate investment, you declare the charges and fees on your rental, as well as depreciation to reduce the taxable base. If you manage your SCI well, it is possible to declare no profit for many years and not pay taxes. The SCI under IS is attractive for high-income investors investing in properties requiring major renovations.
SCI with Income Tax (IR)
An SCI subject to income tax is called transparent. This means the company pays no tax, but the partners pay tax based on their share in the company. If you own 40% of an SCI that has invested in a property, you will pay 40% of the tax on the rental income.
As with a classic investment, you can opt for the micro-foncier regime or select the real regime. Either you benefit from a flat-rate deduction of 30% on your rental income, or you deduct rental expenses and loan interest, and you have access to the rental deficit up to €10,700 per year.
Local Taxes for Non-Residents
Non-Residents and Housing Tax (Taxe d’habitation)
As a non-resident, only your secondary residence (résidence secondaire) is subject to the housing tax (taxe d’habitation). If you co-own a secondary residence through shares in an SCI, you will be liable for the housing tax proportionally to your shares.
Note that exemptions and reductions for the housing tax (exonération et dégrèvements de taxe d’habitation) only apply to primary residences (résidence principale), so you will not be eligible for these benefits.
💡 Good to know: Some municipalities apply a surcharge on the housing tax for secondary residences (majoration sur la taxe d’habitation des résidences secondaires).
Non-Residents and Property Tax (Taxe foncière)
A property owner’s tax residency (résidence fiscale) does not affect their liability for property tax (taxe foncière). Therefore, if you reside outside France, you will still be liable for property tax on real estate owned within French territory. If you own real estate in France through shares in an SCI, you will also need to pay property tax based on the number of shares you hold.
How to Declare Rental Income for Non-Residents?
Tax Declaration in the Year Following Your Departure Abroad
Rental income received in France must be declared in the year following your departure abroad, either in paper format or online.
During this specific first year, the declaration is done in two stages:
- Income received from January 1st to the date of your departure: Use form 2042.
- Income received from the date of your departure to December 31st: Use form 2042-NR.
Tax Declaration in Subsequent Years
In the following years, the tax office will be well informed of your change in tax residency. Therefore, you will no longer need to complete form 2042-NR (except for the year of your return to France).
Your French-sourced rental income will thus be declared on form 2042.
If you choose the paper format, remember that this declaration must be sent to the Non-Resident Tax Office at the following address:
10 rue du Centre
TSA 10 010
93 465 Noisy-Le-Grand Cedex
However, it is recommended and much simpler to file your tax return online via your personal space on the website www.impots.gouv.fr.
Sections to Complete for Declaring Rental Income
To declare your rental income, complete the following sections:
Unfurnished Rental Income:
- Micro-Foncier: Box 4BE on form 2042.
- Real Regime: Form 2044 + form 2042, box 4BA (if profit) or 4BB (if deficit).
Furnished Rental Income:
- Micro-BIC:
- Non-Professional (LMNP): Box 5ND for standard furnished rental, 5NG for classified furnished rental (form 2042 C Pro).
- Professional (LMP): Box 5KP or 5KO (form 2042 C Pro).
- Real Regime: Dossier 2031 + form 2042 C Pro, box 50A (if profit) or 5HY (if deficit) or 5KC/5KF depending on your situation.
Tax Declaration for Managers or Associates of an SCI
As non-residents, when the SCI is transparent (meaning the tax declaration is done at the associate level), your share of the rental income should be declared as follows:
- For Managers: Use form 2072.
- For Associates: Use form 2072-S.
- For SCIs owning property eligible for tax reduction schemes or bare ownership: Use form 2072-C.
In all cases, the sections related to deficit or profit must be declared on form 2042.