Tax reforms initiated by the government in 2018 will probably only have a limited effect on the real estate sector. Existing tax advantages remain in place. Even better, certain cumbersome administrative procedures have been cut back.
How are property owners taxed?
With certain specific exceptions, income tax applies to rental income earned. If rental income is generated by empty, i.e. unfurnished, rental properties, it comes under the category of “real estate income”. If you earn less than €15,000 rental revenue per year, you can opt for the “micro-foncier” (reduced tax on modest rental income) regime, a simplified way of declaring your income. A reduction of 30% is automatically applied without you having to supply any form of proof whatsoever
When income exceeds €15,000, the actuals regime applies. You yourself are then entitled to deduct all expenses linked to the property: interest on mortgages, lender’s insurance, cost of works, etc.
If the income is being earned on a furnished rental apartment, it is considered as “commercial and industrial earnings” (“BIC”). The principle is exactly the same, but even more advantageous. Beyond the threshold of 70,000 euros of rental income, the “actuals” regime applies. Up to that threshold, you can opt for the simplified “micro-BIC” regime and benefit from an automatic flat-rate reduction of 50%.
What about “flat tax”?
The one-off flat-rate payment (“PFU”), also known as “flat tax”, came into force on 1st January 2018. It was one of the flagship fiscal measures the government was keen to introduce. Instead of submitting income from savings to the incremental sliding-scale income tax, it is now subject to a 30% flat-rate tax.
All forms of savings are impacted by this reform, “Livret” savings accounts, life assurance, or capital gains on selling shares.
Real estate is only marginally affected by this reform. Interest on property savings schemes Plans d’Epargne Logement or “PEL” are, however, now going to be taxed starting this year. They will be taxed at a rate of 30% under the new “flat tax”. Savers who opened their PELs prior to 1st January 2018, however, will only have to pay tax on the interest earned from the date of the PEL’s 12th anniversary.
The reform does not target rental income, which remains, however, subject to income tax, under the conditions mentioned above.
Greater opportunities to not pay tax
To understand why tax on real estate is still advantageous, we need to take another look at how rental income is taxed. And more particularly at furnished rentals.
Before 1st January 2018, to benefit from the simplified declaration micro-BIC regime, an owner’s gross rental earnings over the year had to be below €33,200. As we have seen, that threshold has now been raised to 70,000 euros, more than double the previous limit. A neat way of making the whole process easier for a growing number of investors, who can thus benefit from a particularly advantageous tax system because of the 50% reduction.
Despite the increased micro-BIC thresholds, in most cases, the “actuals” regime is still the most advantageous for investors. Especially for expat investors renting out furnished apartments. This regime means being able to deduct amortisation, as well as all the charges inherent in the business of renting out furnished property (interest on mortgages, insurance, agent’s fees, cost of My expat, etc.).
If the sum of all expenses declared exceeds rental income, you do not pay any tax at all on that income. And if you are in a position of deficit, your losses are deductible from your other sources of income (up to a limit of 10,700 euros per year). You can still, therefore, reduce your tax bill, or even not have to pay any tax at all thanks to your decision to invest in real estate.
To find out more, you can contact one of our experts on buy-to-let property for expats.