What is the French "wealth tax"?

The threshold. For purposes of a non-resident property owner, the French wealth tax (popularly known in France as ISF) pertains to real estate assets whose net value exceed 1,300,000 €.

For buyers contemplating a purchase that could potentially subject them to ISF, there are strategies available to reduce or eliminate entirely any wealth tax liability. One such strategy is to take a mortgage, which reduces the owner’s equity in the property.

Equity value. Note that in calculating one's exposure to ISF the key phrase is net value. Net value is equity in the property. For example, if your property has a market value of 2,000,000 €, and you have an 800,000 € mortgage on the property, your equity is 1,200,000 €, and you are not liable to the wealth tax because it falls below the 1,300,000 € threshold.

When Président Hollande took office in 2012 the ISF had two rates: 0.25% (that's one quarter of one percent) for equity up to 3,000,000 €, and 0.5% on net value above 3,000,000 €.

In mid-2012 the Hollande administration increased the tax rates. However, it retained 1,300,000 € as the point at which the tax is triggered.

Current ISF rates. The tax rates are graduated into six different tranches, or progressively higher levels of taxation. The tranches start at zero and go up to values of 10,000,000 € and above.

The first tranche applies the value between zero and 800,000 €. There is no tax on this portion of the value. The second tranche is for equity value between 800,000 € and 1,300,000 €. The tax for this tranche is 0.50% (that is, one half of one percent).

For the tranche from 1,300,000 € to 2,570,000 €, the rate is 0.70%.

For the 2,570,000 € to 5,000,000 € tranche, the rate is 1.00%.

From 5,000,000 € to 10,000,000 €, the rate is 1.25%.

The sixth and highest rate, reached when equity in the property exceeds 10,000,000 €, is 1.50%.

Example. Calculating the tax is a little tricky, but here’s a quick example:

A property has an equity value of 2,500,000 €. This triggers the wealth tax because the value is clearly above the 1,300,000 € threshold.

There is no tax on the portion of the value between zero and 800,000 €.

From 800,000 € to 1,300,000 €, a difference of 500,000 €, is taxed at the second tranche rate of .50%. 500,000 € X .50% = 2,500 €.

Now we look at the next tranche, which covers values between 1,300,000 € and 2,570,000 €. This tranche is taxed at .70%.

The property in our example is valued at 2,500,000 €. That is 1,200,000 € greater than the previous tranche level of 1,300,000 €. .70% of 1,200,000 € = 8,400 €.

Now add the two taxes together to get the total tax due: 2,500 € + 8,400 € = a total of 10,900 €. This is the total wealth tax due annually on a property with an equity value of 2,500,000 €.

Summing up. In short, the wealth tax is clearly aimed at the wealthy, but is clearly not as onerous as its name implies. When combined with the low annual property taxes (taxe foncière and taxe d’habitation) paid by all owners in France, the total annual tax for a high-end property is still well below what owners of similarly valued properties would pay in the United States or UK.

Can I offer my property for short-term rentals?

Country properties. For country properties that are not your principal residence, the answer is yes, you absolutely may rent your vacation property as much as you wish. You may make it available through established rental agencies like www.justfrance.com , through Airbnb and on do-it- yourself rental sites like www.vrbo.com . France is the world’s #1 tourist destination, so you’ll have a good market. Renting is a good way to defray operating expenses, and many owners realize an annual net profit from seasonal rentals.

Paris. For Paris, the answer is a more complicated. Our answer is restricted here to situations where (a) you own the property but it is not your principal residence, (b) you are offering the property for short-term rentals of less than a year.

First, before launching a rental program in Paris, you must verify that the co-proprietors association in your building has not restricted short-term rentals. Such restrictions are rare. 

Second, you should be aware that the Paris city government announced in 2006 a program to curb short-term rentals as a means of increasing the inventory of long-term rental units for Parisians. The program seemed aimed particularly at foreign owners. Violators were subject to stiff fines.  

For several years enforcement of this program was spotty, with few owners actually being notified to cease short-term rentals. However, 2015 and 2016 saw a radical change, with city officials carrying out raids on apartments in the Marais and elsewhere. See http://www.thelocal.fr/20160113/paris-cracks- down-on- illegal-airbnb- flats.

The raids appear to have principally targeted properties advertised on the www.airbnb.com site. To date we have heard few reports of trouble from owners who do not use the Airbnb site.

In the few instances where owners have reported an encounter with the Ville de Paris, the pattern is strikingly similar. It begins when a resident becomes annoyed by the noise associated with the renters’ arrival and departure (the unfailingly cited example is the staccato sound of suitcases being dragged upstairs or across a cobblestone courtyard). The resident asks the owner to stop short-term rentals, the owner refuses, and the resident reports the owner to Ville de Paris. Then the trouble starts.

Some owners have gone out of their way to warn renters to be especially quiet when arriving and departing, and in general to be super-respectful of other residents in the building. Many owners have found this approach successful.

The advice we give our clients is this:

If you can afford it, and/or if you want to be totally secure that you will not troubled by the city and slapped with a steep fine, simply do not offer your apartment for short-term rentals. Period.

If you need the income and are willing to risk a steep fine, fly as far under the radar as you can. Promote the availability of your apartment but remain anonymous by working with established rental companies, or use private channels like print ads in France-oriented publications that are unlikely to be scrutinized. Do not list the property with Airbnb.

Taxes. Finally, don’t forget about taxes.

Stated most simply, rental income is subject to a 20% tax on net income after expenses. If annual rental income does not exceed 80,000 €, the French government offers an automatic write-off of 71% for rental expenses, meaning that only 29% of gross rental income would be taxed at the 20% rate. You can take a larger write-off in the unlikely event that your operating expenses exceed 71% and you have receipts for everything.  

In 2012 the Hollande government added a 15.5% surtax onto the above-mentioned 20%, bringing the effective rate to 35.5% of net rental income. For counties that have a tax treaty with France (such as the United States and United Kingdom), the tax paid to the French government can operate as a credit against income taxes in the owner's home country. But that can get a little complicated, so don’t take our word on this – check with your accountant.

Absolutely - with a few caveats for Paris. The market for seasonal rentals is quite good in Provence and on the Cote d'Azur, and is especially strong in Paris.

Before launching a rental program in Paris, you must verify that the co-proprietors association in your building has not restricted short-term rentals. Such restrictions are rare.

Second, you should be aware that the Paris city government announced in 2006 that it will move to curb short-term rentals as a means of increasing the inventory of long-term rental units for Parisians. The program seemed aimed particularly at foreign owners.

So far enforcement of this program has been spotty, with few owners actually having been notified to cease short-term rentals. That could change in the future, but a wholesale crackdown on short-term rentals seems unlikely, especially in light of its impracticality and the lobbying effort that certain commercial interest have mounted against the measure.

Rental income is subject to a 20% tax on net rental income. If annual rental income does not exceed 80,000 €, the French government offers an automatic write-off of 71% for rental expenses, meaning that only 29% of gross rental income would be taxed at the 20% rate. You can take a larger write-off in the unlikely event that your operating expenses exceed 71%.

In 2012 the Hollande government added a 15.5% surtax, bringing the effective rate to 35.5% of net rental income. For counties that have a tax treaty with France (such as the United States and United Kingdom), the tax paid to the French government can operate as a credit against income taxes in the owner's home country.

Can Just France Sales help me set up a rental program?

Yes. Bear in mind that Just France Sales is a spinoff of a well-established company (Just France,(www.justfrance.com)) that since 1991 has specialized exclusively in the rental of high-end residential properties in France. We are experts in devising customized rental programs. We can introduce you to a property manager, advise you on how to equip the property to maximize rentals, and offer advice on how to market the property to attract high-end clients who will respect the property. The rents generated by your property can cover or go a long way toward defraying operating costs of your French property.