Wealth property tax IFI
Wealth property tax in France, IFI (l’impôt sur la fortune immobilière).
In 2018, the wealth tax reform promulgated by President Emmanuel Macron during his presidential campaign came into effect. The motive for the new taxation is to attract entrepreneurs to invest in French companies and return tax exiles, heavily taxed by this tax earlier in France.
The annual wealth tax (called ISF, l’Impôt de solidarité sur la fortune) is transformed into the wealth property tax, IFI (l'Impôt sur la fortune immobilière). The new wealth property tax liability is now based only on personal real estate assets and not on company or commercial assets of a taxpayer. Financial assets, shares of companies (except shares in real estate), securities, savings and movable property are excluded from the taxable base of the new tax. Taxpayers of IFI will be individuals whose real estate assets are in full ownership or usufruct use and they exceed 1.3 million euros as of January 1, 2018. The applied tax scale remains unchanged with rates from 0.5% to 1.5%.
Who is liable for wealth property tax?
Individuals, tax residents in France with net market value of all real estate assets greater than 1.3 million euros on January 1, 2018, are liable for the wealth property tax. The tax applies to all worldwide property, regardless of its location, on the territory of France or abroad; except for the international tax treaties application to avoid double taxation of the real estate situated abroad (in this case you should study each country tax treaties separately).
Individuals who are residents of another state are also liable to IFI on all property located in France if its total net value is equal to or more than 1.3 million euros.
There is an exemption for five years from this tax on foreign assets for those who become resident in France. This temporary measure can only be applied for up to 5 years after you become a resident in France (31st Dec of 5th year) and during this period, you will only be liable for the wealth tax on real estate assets located in France. Be aware that the taxpayers who have already used this measure in the previously applied wealth tax of ISF can continue now to apply the IFI before the 5 years expiry.
Who pays the property tax on wealth?
The tax on wealth only concerns individuals and their families. To find out if your real estate assets are greater than 1.3 million euros to pay the IFI, you should summarize all the assets of property belonging to each member of your household as of January 1, 2018.
The real estate assets of the whole household living together are taxable, including:
- Spouses, regardless of their matrimonial regime,
- Couples who registered PACS (le pacte civil de solidarité) agreement.
- Couples in free union, who live together without official marriage.
The property of underage children (minors) is taxed together with the property of their parents. Children of adult age (more than 18), even though they may part from your household for income tax purposes, are separately liable on the value of their own assets, if greater than €1.3million as of January 1, 2018.
However, it can be possible to avoid the IFI if the couple has separate declarations, as the tax base will be calculated for each person separately. In order to declare the property tax of spouses separately, two conditions should be fulfilled:
- Spouses should be married under the separation of property matrimonial regime
- Spouses should live separately, that is, each spouse must have a separate home address (for example, when one of the spouses exercises their business activities abroad he/she can have other place of residence).
For couples who are going to divorce, as well as those who were not married under the separation of property regime, the joint declaration is mandatory, except the judge issues an official permit to the couple for separation on the 1st of January 2018. The desire of one of the spouses to separate is not enough to change the IFI declaration procedure.
What are taxable assets for the IFI?
The IFI, the wealth property tax is subject to all real estate assets and investments in real estate such as shares held in French property companies, called sociétés civiles immobilières (SCI) and shares held in property funds. It is also necessary to declare all the built and unfinished real estate, regardless of their designated uses:
- Constructed buildings (for personal use or lease): houses, apartments and their outbuildings (garage, parking, cellar, etc.)
- Buildings classified as historical monuments,
- Buildings under construction as of January 1, 2018,
- Unfinished buildings (land for building, farmland).
The real estate assets for individual or collective entrepreneurship as well as exercising business activities (industrial, commercial, craft, agricultural or liberal) are exempt from the IFI.
How is the property valued?
The value of real estate is its market value on the 1st of January of the tax year, in other words, this is the price that the owner could sell the real estate on that date.
For a particular property, there are specific valuation rules, for example:
- for the main residence a discount of 30% is applied;
- the leased property can have a tax reduction from 10 to 40%, depending on the type of lease (unfurnished, furnished, commercial lease);
- the value of the property, which is under construction on the 1st of January, is estimated according to its condition for that appropriate date;
- the property held under usufruct (usufruit) is valued at its full market value with exception of some particular cases.
The valuation of real estate can be made by yourself using information of similar real estate offers on the market or similar property sales for the last several years. In the first case, you can study yourself the real estate offers on the market or ask for help from a real estate agency. If the agent gives you his estimation, his document will not be an official expertise statement. In the second case, the valuation of the object based on sales history data can be obtained on the tax administration official website in the section of PATRIM or at the notary.
The most reasonable way to evaluate is to involve an expert, but this will entail some "useful" costs. He will provide to you a real expertise with a detailed report, the cost of which starts from 500 euros. But in this case the expert defends the conclusions of his report to the tax authorities if they dispute the declared amount. This expert should be a real estate specialist, who has a special professional insurance for his expert activities. Due to this insurance, the owner can receive compensation in the event that the valuation of the real estate is inaccurate and the tax administration issues fines. In any case, it will be useful for the owner to have an official document with an estimation of his property, even if he believes that he is not subject to the IFI. If the tax authorities request later the additional information, the owner will be able to justify the property assessment with the expert opinion.
What are deductible liabilities for the IFI?
The IFI rate applies to the net property value after deducting all documented commitments that exist as of January 1, 2018. It is only allowed to deduct liabilities associated with the taxable assets.
The deductible liabilities are:
- expenditures related to the acquisition of real estate, taxable rights to real estate, loan obligations;
- expenses related to the repair, maintenance and improvement, construction, reconstruction or enlargement of the property
- expenses related to the acquisition of property shares or shares, in proportion to the value of taxable real estate and rights to real estate;
- the tax debts relating to the properties (for example, property tax). Taxes levied on the tenant (for example, residence tax) are not deductible. The income taxon property is also not deductible.
Since 2018, liabilities associated with a short-term IN FINE loan are not fully deductible. This loan is deducted partially, according to the principle of a classic loan for the period of repayment. This means that it is necessary to recreate the linear depreciation of the IN FINE loan to determine the amount of deductible liability. For example, the IN FINE loan of 6 million euros is for 10 years, after 5 years it will be deducted up to 3 million euros.
The owner has an IN FINE loan for 10 years.
The date of loan registration is 01.07.2012.
The loan amount is 6 million euros.
Starting from 01/01/2018, according to the new IFI law, the IN FINE loan is considered as a repayable (classic) loan for the term of the loan.
The loan repayment table will look like this (see the table below).
At 01.01.2018, the loan liability is €3 million. Next year, the liability will be €2.4 million.
Debts related to perpetual loans can be deducted to a depreciation sum of 20 years repayment.
Debts contracted with a member of your household or other relatives (ascendants, descendants, brothers or sisters) are no longer deductible from IFI unless the taxpayer justifies the normal nature of the transaction (loan taken under market conditions with amount, maturity and other liabilities on its return).
From 01.01.2018, the limitation for the deductible liabilities was introduced when the value of the property assets exceeds €5 million and the amount of the debt exceeds 60% of the assets value. When it occurs the amount of the debt exceeding this threshold is only deductible for half of its value.
How is the IFI calculated?
The wealth property tax is an annual progressive tax, with rates from 0.5% to 1.5%. The IFI liability triggers when your net property assets is greater than €1.3 million, when it is then applied on net property assets above €800,000.
The net real estate value is 6 million euros.
The calculation principle:
(1,300,000 - 800,000) x 0,5% = 2,500
(2,570,000 - 1,300,000) x 0.7% = 8,890
(5,000,000 - 2,570,000) x 1% = 24,300
(6,000,000 - 5,000,000) x 1,25% = 12,500
In total, the tax will be 48 190 euros (2,500 + 8,890 + 24,300 + 12,500)
Alternatively, the tax can be calculated using the quick calculation formula.
In the case, where the net real estate value of the property is 6 million euros, the applied formula will be:
(P x 0.0125) - 26 810 €
In total, the tax will be (6 000 000 x 0.0125) - 26 810 € = 48 190 €
You can use the ready calculator for IFI tax calculation here.
When and how is the IFI DECLARATED?
If the net value of your property exceeds € 1.3 million as of January 1, 2018, you should submit an annual tax declaration.
The article data is based on the tax declarations of 2018.
The article is published on 25.05.2018.
The deadline for submission is Tuesday, May 22, 2018 for the online declarations and Thursday, May 17, 2018 (extended until June 15, 2018) for declarations in paper sheet for both residents and non-residents.
Non-residents, who have income from French sources, should provide information about the IFI at the same time as their income tax. Residents of Monaco should send their declarations to the Income Tax Service located in Menton.
When submitting an IFI declaration, it is not necessary to calculate the tax yourself and pay it. The IFI amount notice will be sent to you in August 2018, and the IFI payment should be made no later than September 15, 2018.