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France does not impose any foreign investment restrictions on property investment. Property rights are well protected. However, round-trip property transaction costs are fairly high (around 16%).
Don’t forget that the French tax system is all but neutral. If you are considering becoming a French property tycoon, the taxman is just waiting around the corner.
The French do view their homes as an investment asset. Being an owner occupier generally comes along with significant tax benefits, such as:
To that extent, French principal residence-related tax reliefs are quite similar to those seen in the UK or in many other countries. It’s just that France may levy tax of up to 59% on any non-exempt income in nominal terms, i.e. before inflation. There are wealth taxes on top of that (up to 1.5%). If you invest in French property but your income is not exempt, the Government may well take more than 100% of real income whereas it would take 0% on your main residence. Keep this distortion in mind if you are considering buying French property.
It is common practice for the French to buy second homes or investment property. However, any such plan must be given careful consideration. Feel free to retourner le problème dans tous les sens, i.e. think about it again, and again...
Housing market statistics are available online.
French property market generally
French property prices are one of the highest in Europe. They have risen a lot over the past 20 years.
As in the UK, there is a really big difference between the capital and everything else. A flat in central Paris sells for €8,200 per sqm (€13,000 for prime property) whereas you could expect to pay around €5,000 in the suburbs (banlieue). Prices are much more reasonable when you move outside the Paris metropolitan area. Typically, you could expect between €3,000 to €4,000 per sqm in a regional centre, such as Lyon, Bordeaux, Lille or Marseille. In the countryside, prices can drop to €2,000 to €3,000 per sqm. This obviously excludes municipalities with ultra-high property taxes (see below).
Prices in world-class tourist areas (Île de Ré, Mont Saint-Michel, Deauville, Courchevel, French Riviera, etc.) can easily get crazy as well. Many French people, along with an increasing number of British and Dutch expats, have found the trick to get round this: go on holiday in less crowded areas.
At the moment, property transactions are at record low because of persistent uncertainty regarding housing market regulation or taxation. Buyers cannot afford to buy at today’s asking prices, and sellers refuse to cut their prices. Properties remain unsold unless their quality is really good, which in turn may distort housing market statistics.
It is often argued that French property prices will finally shrink over the next years, thereby reversing most above-inflation gains made over the past decades. In fact, it’s essentially a matter of psychology: today’s property owners have yet to realise and agree that they will lose money. When they do, things can unfold quickly.
You could expect to pay between 2.8% and 4% on a French mortgage. Some mortgages may be regulated and/or subsidised. Many first-time buyers do arrange an optimised mortgage mix with their bank.
Get your documentation right before applying for a mortgage, and do it early to avoid disappointment.
From a financial point of view, remember that:
For more information on mortgages in France, see ACCOMMODATION – Mortgages for Expats in France.
Property taxes (taxes foncières) are levied by local authorities. The rates vary strongly from one local authority to another.
Higher property taxes mechanically shrink property values and rental yields. Prior to purchasing property, it is essential that you check how much property taxes you can expect to pay.
Property taxes are really a key component of the French housing market. If you find that a house is worth €1,000 per sqm in a district (department/commune) whereas it is worth €2,000 per sqm in the neighbouring district, look no further. Generally, property taxes are very low in the Paris metropolitan area.
Letting your property
There are many slum landlords in Paris, and that’s a lucrative business – until you get caught. You should not attempt to evict a tenant illegally, as illegal eviction (violation de domicile) may be a criminal offence.
Do check French landlord and tenant law prior to leasing property. Typically, the minimum tenant stay is 3 years for unfurnished property and 1 year for furnished property. Generally speaking, rents are freely negotiated but they cannot be revised up by more than the inflation rate.
Typically, you could expect a gross rental yield of between 4 and 6%, i.e. before taxes and any interest or maintenance expenses. In Paris, the gross rental yield is more likely to be between 2.8 and 4%.
It is expected that a universal rents guarantee scheme will be introduced from 2016. Rent payments will be guaranteed by the Government. In exchange, a small tax on rents (1 to 1.5%) will be introduced.
Property investment can be made by buying shares in listed real estate companies (SIICs). These are similar to Anglo-American REITs in that they distribute most of their rental income in exchange for corporation tax exemption at company level.
From a financial point of view, the return on property investment comprises of:
If rents are to rise (e.g. because of inflation), you are more likely to make capital gains over the long run, i.e. without taking into account medium-term fluctuations, such as mortgage availability.
Property investment through a company
The French Government doesn’t like property investment through company, especially overseas companies. High tax charges often result from such schemes. If in any doubt, seek advice.
However, many French families set up a SCI (Société civile immobilière) to hold their property investments. Typically, there is one SCI for each property. This investment vehicle is often much more complicated than it seems, and it should generally be justified by legal considerations. There again, feel free to get professional advice.
Overseas property investments
If you make money from property located outside France, this is likely to be treaty-exempt in France but taxable in the foreign country. The exemption applies to rents and capital gains. Otherwise, it is fully taxable in France.
If your foreign-source rental income is treaty-exempt, you will still have to report it on your French tax return. It will then be taken into account for the purposes of determining your effective tax rate on any taxable income you may have. This rule is commonly called “exemption with progression” (règle du taux effectif).
Generally, it is best to invest in a country whose tax rate is lower than your effective tax rate in France.
Samuel is a US expat in France. He owns a few flats in the US, of which he makes €30,000 per year, net of all allowable expenses. He also earns a pension of €20,000 per year.
Samuel is taxed in the US at 30% on his US-source income, i.e. his US tax is 30% * 30,000 = €9,000.
The French Government will then apply its progressive scale on his worldwide income (€50,000). Using the 2012 scale, this results in a notional French tax (before treaty exemption) of €9,433. This is an effective tax rate of 19%.
The proportion of his treaty-exempt income is then calculated (30,000/50,000 = 60%). Samuel is thus granted a tax credit of 60% * 9,433 = €5,660 against his French tax liability.
Net French tax to pay on his pension: 9,433 – 5660 = €3,773.
Although Samuel’s French effective tax rate (19%) is much below the US tax rate (30%), Samuel is better off investing in the US to the extent that French-source rental income is subject to social taxes (15.5%). The treaty exemption on US rental income, however, is also applicable to French social taxes.
Under French CFC legislation, the taxman may also tolerate that you invest in overseas property through a corporate vehicle while using that vehicle to derive passive income. In all cases, you are expected to primarily hold property. Income from overseas property investments through a Controlled Foreign Company (CFC) is normally not attributable each year to the French shareholder. Exit taxes may apply upon departure from France.
Sections in FINANCIAL CONSIDERATIONS IN FRANCE:
» Money Transfers for Expats in France
» Foreign Exchange for Expats in France
» Banking for Expats in France
» Pensions for Expats in France
» Investment for Expats in France
» Wealth Management for Expats in France
» Property Investment for Expats in France
» Insurance for Expats in France
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