Important Tips When Buying Property in France:
For many people who love France and especially Paris, the city of light, the dream of living here has become a reality. The internet and technology have made it possible to stay in touch with the office from anywhere, meaning you can realize your dream of buying your pied a terre in Paris or Mas in Provence while ‘commuting’ via email.
If you have found the apartment or home of your dreams, the most important steps are to submit the written offer and then to set up the best ownership structure. In making the written offer, there are important ways of wording it so you, the buyer are protected, including offers dependent on financing, etc.
In buying the property, it may be better for you to own it in the name of a company rather than in your own name. Our advice is to get in touch with a tax specialist when you begin your search. When you have found something, they can quickly help you make the written offer and steer you through the complexities of purchase.
Structure: For tax and inheritance purposes, one of the best ways is to set up a ‘Société Civile Immobilière’, or SCI in which your family or partners set up a closed company incorporated in France.
Based on your personal income and savings, the Company can be used to borrow the necessary funds, meaning you can deduct the interest and other costs from rental income. There is no need to have a compulsory minimum capital in the company in order to establish it.
Purchase Costs: It is compulsory to hire a Notaire to execute the purchase transaction. They are not like Notary Publics in the United States, but Officers of the State who must prepare the deed and oversee all aspects of the purchase. We write more about this in our next column, but the important point is that the non-negotiable fees and transfer taxes will amount to approximately 7% of the purchase price.
Important word of advice: your real estate agent may propose that you share the same Notaire as the seller to facilitate the purchase and to potentially save you money. We strongly advise against this; the notaire is no longer working for your interests alone and important points in the contract can be worded in ways that favor the seller, to your great disadvantage.
In many towns, the Notaire may also operate as a real estate agent who finds your property. Again, we would not use the same Notaire to represent you if they are the agent for the property; there are many subtle issues which can be worded in several ways and you cannot be guaranteed that they will favour you, the buyer.
In short, find your own notaire. If you do not know any, Adrian or I can provide the names of several who I would recommend.
Getting a loan: As a non-resident of France, it’s not easy to borrow money from French banks. US banks are generally reluctant to lend money for overseas property. However, there are several UK banks as well as GE Finance who have offices in France. They understand the mortgage market well and they are more flexible to deal with. Count on loads of paperwork, irrelevant questions and time involved to complete the paperwork and process the loan.
Word of advice: Most French banks will ask you to sign a personal guaranty for the loan even though your company is borrowing the money. This is difficult to avoid if you are borrowing 80% to 90% of the value. However, if you are contributing a significant amount of the equity, i.e. 40 to 50% of the equity, it may be a negotiating point with the bank to avoid signing one.
Life Insurance Tip: Look at the life insurance requirements that the bank requires as part of the mortgage. You can usually opt to buy it separately and will undoubtedly save money if you do so.
Income Tax: If you intend to live in your apartment for less than 183 days/year and not rent it, then no income tax will be levied in France. Watch out; if you stay longer than that you become liable for French income tax and wealth tax on your worldwide assets and income!
In any case, you will pay a local annual tax (“taxe d’habitation”) and a land tax (“taxe foncière”) based on the value of your apartment determined by the French tax administration. Ask the seller for the amounts before you buy, so there are no surprises but they are relatively small.
Rentals: If you intend to rent the apartment for all or part of the year, the income you receive is taxable in France and you must file a tax return annually. As anywhere, you can deduct interest and expenses in proportion to the rental period and pay tax on the profit.
The best advice I can give is to file an annual French tax return if you rent it out! Every year, we receive calls from Americans and other foreign nationals who did not know they needed to file returns or pay taxes on their French rental income and who were ‘caught’ by the Fisc’s. We do our best to minimize the consequences, but if they avoided tax, there are always penalties involved.
If you have mistakenly paid the income tax in the wrong country it can be offset, but only up to a certain cut-off date, so be sure to contact a tax advisor when you are ready to buy your property.
Some property owners hope to avoid the radar screen and rent their home or apartment out ‘quietly’. I strongly discourage this: it is illegal and the consequences are not worth the risk. The French ‘Fisc’ have many ways of obtaining information about your rentals: phone calls, electricity consumption, neighbors, etc. and they will use their full resources if they think you have avoided paying taxes.
France has a tax treaty with the U.S., who they will contact if they feel they have a case.
Remember there are more tax inspectors in this mid-sized country than in the US, a country many times its size!
Unfurnished rentals: In the rare case you wish to rent your property unfurnished, you will declare the income as “revenus fonciers”. After the standard deductions of interest payments, utilities, commissions, management fees, etc, the partners of the SCI will be directly taxed as personal income tax. Personal income tax rates for the year 2004 varied between 0 and 48,09% depending on your total income in France.
Furnished rentals: If you rent your property as a furnished rental, or ‘location meublee’, the net income will be taxed at the corporate tax rate of 33.33%. A local business tax (Taxe professionnelle) is also levied on 16% of the assets acquired by the company (intangible assets taxed separately), yearly rate approximately 14% (of 16%) in Paris.
If you don’t charge sales tax (the TVA or value added tax) on your rental, then the company must pay a special contribution equal to 2,5% of the revenues annually.
When the net income of the company (the amount liable to corporation tax) is distributed, each partner will be taxed by application of the tax treaty between France and the country where they are a resident in order to avoid double taxation.
Wealth Tax (ISF): If your French property’s value exceeds € 732,000 you will be taxed an annual French wealth tax on it. This calculation amounts to 0,55% up to €1.180.000, then 0,75% up to € 2.339.000. There are ways to set up complex structures to avoid ISF but it depends on the buyer’s situation and his plans for the company. Basically, it’s difficult to avoid it.
If you have any questions, don’t hesitate to ask and I’ll be happy to answer them in a future column.
Viart.jl@free.fr
lexxelavocats@free.fr
Address: 1, rue François Coppée 75015 Paris Background:
Jean-Luc Viart is a French tax specialist who advises French and International clients on tax and real estate issues. Since qualifying for the bar 1971, he worked as a tax specialist for a number of Multinational Companies before striking out on his own in 1991. He lives and works in Paris and is a member of International Fiscal Association.
Madelyn Byrne and her husband Philippe have been investing in France for over 20 years. They have bought and remodelled numerous apartments for their vacation rental business, www.parisperfect.com . Madelyn received her MBA at Stanford Business School in 1981 and worked as a Financial Analyst and Investment Banker in London before leaving the City to devote herself to being a mom and helping to run ParisPerfect. ‘From personal experience, we think we have run across most issues when buying property in France; we have been fortunate to make money but also to lose money. Finding and buying the right property can be complex, especially when French is not your native language; from questionable agencies to bad builders, being ‘gazumped’ or outbid on a property, to negotiating through purchase contract and financing issues.’
