As a non-resident owner of a furnished rental property in France, your rental income will be subject to income tax by French Tax Authorities. With France being the most visited country in the world, tourism is very important for the French economy.
French government is therefore incentivising purchaser that will rent out their property on a short term basis by proposing a very tax advantageous tax regime that offers many ways of decreasing taxation on their rental income.
There are two main ways of reducing your tax liability on your furnished rental property:.
1) Offsetting any tax and deductible costs relating to the property
There are many types of costs which owners of furnished properties in France have to pay which can be offset against their tax. These include:
- The notary fees paid at the title deed signature stage can be deducted over the first 3 years of ownership (Notary fees are calculated at around 2.5% of the purchase price)
- All charges related to the property (co-ownership charges) can be deducted from the taxable amount
- Land taxes are also deductible
- The cost of one return journey to your French property (based on the official French Tax Authorities tariff)
- The annual interest on the mortgage
- Accountants’ fees are also deductible, approx. €270 per year
2) Amortising the Property
In the realms of property tax, amortisation can be a troublesome concept for some buyers and investors to grasp simply as it isn’t a system which is widely used in their own country (i.e. the UK).
Amortisation is the simple process of depreciating the ‘paper’ value of your property. Just to be clear, nothing is being done to the actual value of the property; this will remains in line with the local market.
The French tax authorities consider about 20% of a property purchase price to be of land, which cannot be amortized. The remaining 80% of the property can be amortised (‘on paper’) by either 4% per annum over 25 years or 3.33% over 30 years (3.33% x 30 = 100%).
The amortisation can be offset against your rental income allowing you therefore to reduce or even cancel your income tax liability.
Any furniture costs can also be amortised over 10 years or 5 years meaning even less tax is applicable as it gives you another cost which can be offset against your rental income.
Example of amortisation:
- You buy a property costing you €100,000 + €10,000 for furniture
- You receive a rental income of €4,000 every year
- You can amortise the €80,000 (80% of the €100k property value) over 25 years which equates to €3,200 every year. The €10,000 furniture costs are also amortised and over 5 years this would equate to €2,000 per year.
As a result, in this example you would have €5,200 worth of amortisation every year (during the first 5 years). As your rental income is €4,000 you will use only this amount of your €5,200 amortisation value leaving you with €1,200 which you can carry forward to the next year.
Only use amortisation when you need to…
Amortisation can be started whenever an owner chooses. For owners who have bought a property using a mortgage, the mortgage interest value and other off-settable costs can often be enough to cancel the rental income tax liability altogether which means there is no reason to start using your amortisation value to offset your tax. Instead you can start using your amortisation only when you need it (for example when the mortgage interest isn’t enough to offset 100% of your rental income).
At the moment, with French mortgage rates at historic lows, most buyers opt to finance their purchase. When finance is used, during the first few years of property ownership, the mortgage interest and other deductible costs can normally offset the entire taxable figure on rental income. This means the amount of tax you pay on your rental income is negligible or nothing at all.
Once the mortgage interest is paid off or is no longer enough to offset 100% of the rental return, or if the purchaser bought using cash, then the amortisation can begin, meaning the tax on rental income can still be significantly reduced or in most cases completely eliminated.