Bonjour! Do you have a second home in France and are not sure what the wealth tax rules are? Don’t worry, you’re not the only one. While owning a second home in France can be very attractive, the subject of taxes can sometimes be quite confusing. In this blog post, you will read everything you need to know about capital gains tax on your property in France. So you can enjoy your French property with peace of mind!

Wealth tax France, what is it?

First of all, what is wealth tax? It is a tax levied in France on the ownership of movable and immovable property, including your second home. It means you have to pay tax on the value of your second home in France.

There are different types of wealth tax, but in this article we will focus on the Impôt Sur la Fortune Immobilière (IFI). This is the tax levied specifically on property ownership.

IFI replaced by ISF

In 2018 in France, the Impôt de solidarité sur la fortune (ISF) was replaced by the Impôt sur la fortune Immobilière (IFI). Unlike the former ISF, the IFI is a wealth tax that applies only to immovable property. For someone with only a second home in France, this actually makes no difference.

When do you pay wealth tax in France?

The IFI applies to individuals who have a total net worth of at least €1.3 million. Here, net worth is the total value of all assets (such as property, bank accounts and investments) minus debts and loans. If you fall into this category, you are in for a treat: you are subject to the IFI for your second home in France.

The tax rate ranges from 0.50% to 1.50%, depending on the net value. If the net value of your assets is less than €1.3 million, you do not have to pay wealth tax.

How to calculate equity with a mortgage loan?

If there is still a mortgage on the property, you would do well to look at the type of loan taken out. There are different rules for interest-only mortgages or mortgages that are repaid in one lump sum at the end of the term.

More restrictions when value exceeds €5 million?

For very expensive homes, debt deduction options are further restricted.

But what if the value of your French property exceeds €5 million and the total of deductible debts is more than 60% of that value? Then only half of the portion that exceeds 60% of the value will be allowed as a deduction. Unless you can prove that you did not incur the debts mainly for a tax purpose.

Debt deduction limitation

Does financing debt matter if your French holiday home is worth more than €1,300,000? Yes. This is because it can reduce the tax base for French wealth tax.

This is great because it means you will have to pay less tax in France. Debt deductibility has been limited in certain cases since the introduction of the IFI.

Repayment-free loans

In principle, deductible debt falls as long as contractually agreed repayments are made. But what if it is a ‘repayment-free loan’ that is only repaid in a lump sum at the end of the term? To apply the IFI, the loan has to be repaid on a straight-line basis where you have to start counting from the loan start date. The notional annual repayment is calculated by dividing the original principal by the loan term in years.

Loans without an end date

The French government wants to prevent holiday home owners from being able to keep the IFI tax base low for a long time by taking out loans with no maturity date on which no repayments are made. It therefore stipulates that such loans are subject to a lump-sum annual deduction of one-twentieth of the original loan amount. In other words, for the purposes of the IFI, the loan is notionally repaid on a straight-line basis over 20 years. Even if no repayments actually take place.

Loans from friends or family

Debts incurred directly or indirectly, through the intermediary of one or more companies, with the debtor himself, his partner or minor children are completely excluded from deduction anyway. Debts taken out with your own PLC are therefore not deductible.

For debts with (a company of) other family members – such as (grand)parents, (grand)children, brothers, sisters – deduction is only possible if normal loan conditions apply. In addition to an arm’s length interest payment, it is particularly important here that agreements have been made on repayment of the debt and repayments are actually made.

Use of an SCI

Instead of directly privately, a second home in France can also be held indirectly through a so-called Société Civile Immobilière (SCI). This is a kind of civil real estate company set up by a minimum of two people. For tax purposes, the SCI is basically looked through. That is, the SCI’s assets and liabilities as well as income and expenses are allocated to the participants.

But, according to the double taxation treaty concluded between the Netherlands and France, participations in an SCI are considered movable assets.

France may not levy wealth tax on participations in an SCI held by a resident of the Netherlands. You will only benefit from this if the value of the French home minus deductible debts exceeds €1,300,000. Otherwise, no French wealth tax is due anyway.