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.