The old French wealth tax, known as ISF (“Impôt sur la fortune”), which imposed a tax on worldwide net assets, has never been attractive for people to come in France and moreover, incited celebrities to leave le country as Yannick Noah.
However, since 2018, the ISF was replaced by the “Impot sur la fortune immobilière” (IFI). This new tax is based on the same scheme as ISF but limited to real estate assets, as well as direct and indirect investments or interests in real estate and real estate companies, held on January 1st.
This reform was lead with the aim of enhancing French economic development (attractive for investors) in spite of real estate sector.
How works French Wealth Tax for non-residents
Switch from the ISF to the IFI did not induce many changes for non-residents as they are still taxd as they were before the reform (except regarding the deductibility of a range of debts).
For those who recently moved to France and became tax residents, a five-year exemption for foreign-held assets remains in place. However, this exemption applies only if the individual hadn’t lived in France for the five years prior to regaining their tax resident status. After this five-year exemption period, French tax residents are liable for IFI on all their net real estate assets and direct and indirect real estate rights, both in France and abroad. This is subject to thresholds and calculations detailed below.
What debts can be deducted from the gross real estate value ?
The IFI is calculated based on the taxpayer’s real estate net assets, deducting any debts and other exemptions. However, only debts incurred for purchasing the real estate or for maintenance and improvement of the real estate assets can be deducted.
If a taxpayer’s real estate assets’ market value exceeds 5 million euros, any debt surpassing 60% of the market value of the real estate assets is only 50% deductible. In addition, loans from an entity directly or indirectly controlled by the taxpayer or their immediate family members cannot be deducted from the property value.
How to determine the IFI tax basis
To be applicable, your real estate net assets must reach or surpass €1.3 million. All household members’ assets must be added, and couples, irrespective of marital status, are required to file jointly.
Relevant point to get in mind regarding IFI reduction/exemptions:
A 30% discount is applied to the market value of the primary residence (primary/main residence is the domicile you spent the most part of the year, it is considered to be verified in the event you spend at least 8 months a year at the same place).
Real estate used for professional purposes are IFI exempted. This includes property employed for furnished rental activity, provided the landlord is a registered as a professional lessor (LMP under french law). Beside professional real estate, a 75% exemption is applied to the value of woodland.
What IFI rates ?
IFI triggers as soon as your real estate net value reaches €1,3M€. In this situation, tax is calculated following the IFI tax scale.
€800,000 and ≤ €1,300,000 0.50%
€1,300,000 and ≤ €2,570,000 0.70%
€2,570,000 and ≤ €5,000,000 1.0%
€5,000,000 and ≤ €10,000,000 1.25%
Above €10,000,000 1.50%
How should I value my real estate patrimony?
The taxpayer has to ascertain the market value of their property as of January 1st of the relevant year. The deadline to submit the tax return form is strictly the same as the income tax form (May/June of the year).
There are several options to make the real estate patrimony valued, it is possible for example to analyze the french tax administration database (online) with the last real estate sellings in the sector, or to mandate a real estate agent, or an expert (generally more expensive).
Determining the accurate valuation of rural properties can be challenging due to a lack of comparable properties. In such cases, getting opinions from two or more local agents is advised. Depending on the property’s quality relative to the region’s average—whether it has a remarkable view, recent renovations, or extraordinary features —you might need to adjust the valuation upwards or downwards.
Once you have a valuation for a particular year, you can use it for the following years, unless there are significant events that increase or decrease the property’s market value.
What are the consequences If I miss to send my IFI returns or underestimate the value?
Considering the French wealth tax relies on subjective evaluations of real estate assets, some taxpayers might be tempted to underestimate the value of their property. To counter wealth tax evasion, the French tax authorities is entitle to inflict severe penalties.
A 10% penalty of the due tax applies if you provided the forms and paid the tax, or if it is determined that you’ve undervalued your assets. A further 0.20% penalty applies for each additional month of delay. If the failure to file continues, or if you missed to provide forms on purpose, the additional tax could be increased by up to 40% of the due amount, and in worst cases, to 80%.
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MFL registered lawyers remain at your disposal should you have any queries regarding your real estate tax treatment in France. MFL will provide you with the best lawyers to handle your situation and secure your interest.