Tax and inheritance issues for non-residents seeking to purchase property in France

April 4, 2012

The following is based on a letter I wrote to a client, a non-resident of France, who plans to purchase property in France.

Allow me to outline the area of French law that you should be aware of, as well as pointers related to your proposed real estate acquisition.  

 1)          French income tax issues.  As a non-fiscal resident, the only income tax issue you need to concern yourself with is French income tax on rental income.

2)         Tax on wealth.  If the net value of your French residence does not exceed 1.3m euro, that tax will not be a concern for you.  If it does exceed that amount, we should explore that further.

3)         Inheritance tax.  At the death of the owner(s), there is a potential inheritance tax.  Estate planning is indicated:  Should you make lifetime gifts to children—what are the pros and cons?  What inheritance tax rates apply to each of the parties in this scenario?

4)        Rights of children.   The French have what they refer to as “forced heirship rules”, meaning that a child has an enforceable right to a share of his or her parents’ estates.  This sometimes uncomfortable and unwanted rule (especially if there are children of a prior marriage) can be circumvented for a non-resident by purchasing through a holding company, or else, in certain cases, by executing a French will relating to the French property and its contents.  This very important issue, the choices, and the consequences of each should be thoroughly understood by you.  

5)         Local taxes.  Not many to consider, but they should be known and understood.

6)        Capital gains on sale.  These rules have been changed recently and should be explored. As you are a U.S. citizen, any capital gain is reportable both in France and in the U.S., with appropriate tax credits.  French capital gains rates change, but the rate applying to a U.S. resident (more broadly, to most anyone outside the EU), has remained at 33.33%.  There is a reduction of taxable gain, related to the period of holding, so that after 30 years, the residence may be sold tax-free (in France, that is).

7)         Purchasing the property.   When you have chosen a property, you should consult with us before you sign any document, e.g., a promesse d’achat; promesse de vente or  compromise de vente.  Brokers and sellers are often to eager for you to obligate yourself and will urge you to sign prior to a thorough vetting of the documents.   Brokers will often tell you that signing a promesse d’achat is necessary to hold the property.  That may be true, but you also may be taking the first step toward entering into a binding countract with conditions you may regret.  This is certainly true with the contract of purchase and sale (“promesse de vente” or “compromis de vente”).  Property searchers who you meet on the internet or otherwise may state that they know the legalities because they have been through it a thousand time, and therefore consulting a lawyer is not necessary.  Not so.  Not at all.   A lawyer is an essential part of the deal, and often is the cheapest in terms of cost.   

          We will vet the document for a variety of elements that should or, in come cases, shouldn’t be in it.  We will discuss questionable or unclear points with the seller’s Notaire.  We will advise on the surrounding issues as enumerated in this blog, as well as the overall cost of the purchase, including notarial fees, transfer taxes, etc.  In short, a lawyer, especially one versed in French and U.S. law, is indispensable.  You must have a good Notaire.  Notaires come in all shapes and sizes.  Some are excellent—i.e., reactive, proactive, intelligent; but many are otherwise—the source of frustration, delays and sometimes worse.  We work with an excellent firm here in Paris.  As a Notaire has national jurisdiction, one located in Paris does not compromise your position if you are buying in the provinces.   We will introduce you to our Notaire, but then we do all of the intermediary work and coordination of the deal.  We will “hold your hand” from the get-go up to and including the final closing, which may be two or even three months after signature of the initial contract of purchase and sale. 

8)        You should decide whether to take title in your name individually, in joint names with your wife, or otherwise (e.g., through a holding company, as mentioned above).  Part of this depends on the property regime that applies to your marriage.  Is it separate property or community property?   This crucial fact has to be carefully determined.  

9)     If you plan to finance the purchase, other points come into play.

10)      If you rent out the property at any time during the year, as you indicate you may, there are certain rules concerning short-term rentals of which you should be aware. 

11)       If you set up a holding company, you will need a bank account for the company and you will need to gain familiarity with the rules concerning how such a company is run and what French (and possibly U.S.) reporting requirements exist.

12)      As I am assuming you do not plan to move here, I will not discuss visa requirements, but otherwise, we should consider visa issues and the effect French residence might have on your French income tax and other taxes.  If you are planning to become a resident, that would influence some of the points discussed above.

 

Advertisements

Stuff You Should Know About Reporting Foreign Bank Accounts and Certain Foreign Assets to the IRS

April 4, 2012

Are you concerned, confused or baffled by the IRS foreign financial asset reporting requirements?  If you are a  U.S. citizens, green card holder or otherwise a U.S. income tax resident, the first thing you should know is that you must report and pay taxes on worldwide income.  While that particular rule is generally known, confusion arises about the disclosure forms that have been issuing from the IRS in seemingly ever-increasing number, and their companion regulations and instructions. 

Basically, you are required to report foreign assets.  These forms are informational only, i.e., no tax consequences, but failure to file the required forms in a timely manner can result in heavy penalties.  The following is a summary of what you may need to file, and when they are due, the last section being concerned with penalties. 

U.S. Treasury Form TD F 90-22.1 “Report of Foreign Bank and Financial Accounts.”  This form is commonly referred to as the “FBAR.”   Part III of Schedule B of Form 1040 reads as follows:

_____________________________

7a  At any time during 2011, did you have a financial interest in or signature authority (emphasis mine) over a financial account (such as a bank account, securities account, or brokerage account) located in a foreign country?

If “Yes,” are you required to file Form TD F 90-22.1 to report that financial interest or signature authority?  See Form TD F 90-22.1 and its instructions for filing requirements and exceptions to those requirements.

b.  If you are required to file Form TD F 90-22.1, enter the name of the foreign country where the financial account is located.

 8. During 2011, did you receive a distribution from or were you a grantor of or transferor to a foreign trust? If “Yes,” you may have to file Form 3520. See instructions on back.

_____________________________

While this section of the U.S. tax return has been in existence since the 1970s, it had been largely ignored by many people, especially those living in the U.S., that is, until recent years when the IRS launched its ever widening campaign to identify unreported foreign assets owned by US taxpayers.  It is now imperative that you be aware of these forms and that you diligently conform to the filing requirements.   If you are required to file the FBAR (which is filed separately from the basic tax return), it must be filed on or before June 30th, regardless of any extension you may have to file your basic Form 1040.  

IRS Form 8938 “Statement of Foreign Financial Assets.”  This is a new form and applies for 2011 tax returns (and of course future returns), and results from the notorious FATCA law.  This form is, as they say, a doozy, and requires a close reading of its detailed companion instructions.  It is due to be filed when your basic tax return is filed, including extensions. 

When filing is not required. Neither form is required if you at no time during 2011  had $10,000 or less in aggregate foreign financial accounts and less than $50,000 in aggregate foreign financial assets, and you had no signature authority over a foreign financial account.

As stated, the FBAR must be filed by U.S. taxpayers who owned or had signature authority over foreign financial accounts with an aggrebate value exceeding $10,000 at any time during 2011. What is a “foreign financial account”?  It is includes foreign bank and brokerage accounts as well as  foreign insurance and annuity policies.  Note well, a financial account in a branch of a U.S. bank that is physically located abroad comes within the definition of a foreign financial account.  On the other hand, an account at a branch of a foreign bank that is physically located in the U.S. is not a foreign financial account.

Form 8938 is required if you have an interest in certain foreign financial assets in excess of $50,000 (or, if married filing jointly, $100,000) on the last day of the calendar year, or in excess of $75,000 ($150,000 for joint filers) at any time during the year.  If you reside abroad, higher thresholds apply: If you are not filing a joint return, they are $200,000 on December 31st or more than $300,000 at any time during the taxable year.   If you are married filing jointly, those threshholds are doubled.   Disposition of those assets may also have to be reported.   The definition of “specified foreign financial assets” includes not only assets reportable on the FBAR but also shares of stock in foreign corporations and securities of non-U.S. companies (listed companies on a foreign exchange), as well as an interest in a foreign entity (including foreign trusts and estates). If any such foreign asset is held in a U.S. account, it need not be reported.  On a positive note, for those who do not otherwise have to file a U.S. tax return, filing Form 8938 is waived.

Real estate and movable personal property outside the United States are not required to be reported EXCEPT if owned through a foreign entity.  This is most common among those who own foreign real estate through a holding company such as an SCI.  Shares of such company must be reported in Form 8938. 

Penalties:

Failure to file an FBAR.  If the failure to file is determined by the IRS to be willful, the penalty can be up to the greater of $100,000 or 50 percent of the balance in the foreign account(s).  Moreover, the penalty is assessable each year for willful failure to file.  There may also be criminal penalties.  These penalties are not automatic.  You can show absence of willful failure to file and of course if the income from theose accounts have been duly reported, it will weigh heavily in your favor in mitigating or eliminating the penalties.

Failure to file Form 8938.  The penalty for failure to file the Form 8938 is $10,000, and an additional penalty of up to $50,000 is applied if you continue not to file after a demand by the IRS.  There may be other penalties as well.