New Capital Gains Law in France – Sale of Secondary Residence

September 19, 2011

The French tax rule, that sale of a secondary residence owned for 15 years or more is exempt from capital gains tax, has been changed.   The French legislature has just extended that holding period to 30 years!  The new rule (except for transfers to an SCI which is owned by one or more of the original owners of the propertty being transferred) is effective as from February 1, 2012.   Thus, to achieve total tax exemption, your period of ownership must be at least 30 years at the time of the sale.   If the property is, or shares of a property holding company are, transferred to a French real estate holding company (SCI), the applicable date for initiation of the new rules is August 25, 2011.  

Summary of the how the new rules will apply

During the first 5 years of ownership, the full gain is taxed.   

Between 6 – 17 years, the reduction is 2% per year. 

Between 18 – 24 years of holding, the reduction is 4% per year. 

During the last five years, the reduction in 8% per year. 

Ownership of the property through an SCI does not affect this rule, i.e., the SCI shreholders benefit from the capital gain reduction benefits that are listed above. However, if the SCI engages in furnished rentals and is thus treated for tax purposes as a commercial company, the property does not qualify at all for the exemption.    

N.B.:  U.S. citizens are nevertheless taxable in the U.S. on such sale.  The I.R.S. does not follow the French taxing rules.  Of course, if you owned the property for less than 30 years at the time of sale and consequently must pay some French capital gains tax, you may claim an offset of that French tax against any U.S. tax paid on the same gain.   The offset is referred to as the foreign tax credit

The new law came into effect on 20 September 2011.

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Recent French Tax Laws

September 16, 2011

On July 6, 2011, the French legislature enacted a sweeping law that affects:  (1) wealth tax, (2) gifts and inheritance, and (3) trusts, (4) taxation of life insurance.  If you wish to receive our recent detailed memo discussing the first three items, please contact mail@okoshken.com to request it.  It will be sent to you by email. 

The most sweeping and problematical changes are contained in the new trust law.  They affect non-residents as well as fiscal residents of France.  Practically speaking, the French law does not provide for the creation of trusts.  However, French courts as well as the “fisc” (the French tax authorities), have accepted their existence, but have sought to work out a way of dealing with them for property purposes but, more importantly, for tax purposes.   This portion of the new law, effective as of 2012, makes some dramatic changes to how trust holdings are taxed, including the timing of the tax as well as the rate of tax, and also creates reporting requirements by trustees to the French fisc.  Some standard tax planning techniques are now in jeopardy, and in some cases, those who are beneficiaries of large trusts may have to re-think whether to become French fiscal residents and certainly have to think twice about setting up a trust once they have already become French residents.

The changes in the wealth tax rules (ISF) will result in lower wealth tax for most and no wealth tax for some.  However, reporting requirements are tightened and penalties will be applied for failure to report.   A major change:  shareholder loans to a real estate holding company (SCI, LLC, S-Corp, etc.) are no longer taken into account in valuing the holding company shares for wealth tax purposes.

Gifts and inheritances see some dramatic changes, including an increase in the top rate between parents and children (as well as in the direct line of descent and ascent), from 40% to 45%.  Other changes result in certain gifts being taxed at 60% when in the past they would have been taxed at lower rates.    

Another tax change which, at this writing, has been enacted but not yet published, is the capital gains law that would increase the period for obtaining total exemption from the capital gains tax on the same of a secondary residence in France from 15 years to 30 years.