Tax – deductible works
Written by Professor Robert Anthony, Julien Routa and Matt Anderson, Anthony & Cie
French Property News, January 2008
Improving your French property has financial implications, explains Robert Anthony, but they could be in your favour.
Recent changes in tax laws offer new possibilities for deducting the cost of renovation work. It is worth knowing that you can offset certain types of work you undertake on your property against tax. From a tax point of view, work which is carried out on a property is considered as a tax-deductible charge for the owner, with certain conditions attached. A deduction can be made either from the tax on eventual revenue generated by the property, or from a capital gain on a future sale. However, as the deduction can only be applied once, the latter might be the wiser option.
If the property is the owner’s main residence, the capital gain on the sale is not taxable. Therefore, owners should deduct from their income any work they carry out, providing it meets specific conditions. Every year the government gives some tax advantages to taxpayers who undertake certain types of work on their property. Currently, the most tax advantageous are works which promote sustainable development and energy saving.
However, if the property is a secondary residence, and if you sell it before a certain period of time has elapsed, capital gains tax is payable. In this instance, it is better not to deduct the work done from your income tax and instead use it at the time of sale when the calculation for capital gains tax is made.
Categories of work
In addition, it is essential to know that for the French tax authorities the notion of work varies. There are several categories of deductible works such as renovation, extension, reconstruction, improvement and maintenance. The French tax authorities treat and sometimes define differently what are essentially the same operations. This is the case for example, where maintenance work carried out during renovation work, can be deducted from the tax on the capital gain, whereas if the maintenance is carried out separately, it cannot.
Add to the above the question of VAT, which is reduced from 19.6% to 5.5% for some types of work, the consideration of the tax planning possibilities of creating an SCI (a French civil company set up to own property) or a Luxembourg or Danish holding company, and you will begin to get an accurate idea of the complexity of the subject.
As French taxation is complex, and making the wrong decision could be costly, it is important to take appropriate professional advice so that you make the right choice before beginning any works.
Financing Renovation Works
There are various ways of financing works, such as taking a regular consumer loan, refinancing an existing loan, or releasing equity from a property. If you are in the process of buying a property that you wish to renovate, it is possible to incorporate the renovation costs into your mortgage, subject to certain banking conditions, such as the obligation to use established professionals for structural work.
Owners who purchased a property less than 18 months ago could consider refinancing their property. This could be structured as an interest-only loan over a period of between 10 and 15 years where only the interest is paid. Simultaneously, a sum of money is invested with the bank. At the term of the interest only period, the value of this investment is released to reduce or pay off the overall debt.
Owners who purchased a property more than 18 months ago could consider releasing equity from their property. The entire value of the property is refinanced and a percentage released to the client as liquidity. The rest is invested and accrues interest for the client. Owners may be interested in this financing because the loan can be up to 100% interest only, some banks give an interest holiday for two years, and French banking income constraints are not always applied.
Whether one is a new purchaser or simply wishing to refinance a property, the market is changing. Taking advice about the solution most adapted to your needs could save you money in the long run as well as tax.
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