Why You Need A Lawyer When You Purchase A Property in France

May 7, 2013

First, a note of transparency:  I am a lawyer, qualified to practice in France (as I am in the U.S.). Thus, my position as expressed here must be viewed in that context.  However, I think you will find, after reading this entry, that my opinion is not biased but rather is based on common sense, practical experience and a feeling of concern for foreigners who purchase real estate in France without full knowledge of the process and risks.

What is the process?  Once you have identified a property – usually with the help of a real estate agent – you will enter into a purchase-and-sale agreement (PSA), known as a “promesse de vente” or “compromis de vente”.  The PSA is eventually followed by the actual closing, i.e., transfer of title to the property, the closing usually occurring two to three months after signature of the PSA.  An essential player in the purchase transaction is the Notaire.  The Notaire is legally trained, specializing (after extra and intense supplemental education) in various forms of property transfer.  The forms include transfers of title to real estate, transfers by gift or at death, etc.  It is the Notaire and his team who usually prepares the PSA and sees to it that all legal and administrative steps involved in the eventual transfer of title are carried out.  This includes, among many other items, checking property title (there is no title insurance per se in France—the Notaire is responsible for the passage of good title), seeing to it that various municipal compliance tests (lead, asbestos, termites, electricity) are done and made available to you, clearing the purchase with the municipality, etc.  There may be one Notaire acting for both buyer and seller, or one Notaire for each chosenby each party.  As the buyer pays the notarial fees, if there are two, the single fee is split if there are two.  We usually recommend one for each. 

Sources of legal advice.  Buyers are often under the impression that they are getting all the legal advice they need about their property purchase from the Notaire.  Notaires are certainly well-informed about their subject matter but, due either to their limited view of your particular needs, to cultural limitations, or to language limitations, they usually restrict themselves to offering basic information or perhaps responding to your direct questions—which may not cover all the questions you should be asking.  Further, many real estate agents—who are not lawyers—have acquired a certain amount of knowledge of a real estate transaction due to their involvement in many and, though they should not, do indeed offer advice of a legal nature.  Anyone who has been involved in a matter that requires input from a lawyer, knows that lawyers view a transaction in a special way.  For one thing, we see it holistically, meaning that we see each element in terms of the overall transaction.  So, while a bit of advice may be accurate, it may not be correct in terms of the buyer’s short-term or long-term goals.   

What value can a lawyer add?  A lawyer especially one versed in the laws of the U.S. and France, will be able to advise you on some or all of the following:

  • Should you create a holding company for your property and if so, what form of company?  What are the advantages and disadvantages of a holding company?
  • What possible opt-out clauses can be added to the PSA to protect your interest in the purchase?
  • What estate planning measures should you be thinking of when purchasing a property?
  • What are the French and U.S. income tax and capital gain implications of your property holding?
  • What are the French wealth tax implications?
  • The lawyer will read the PSA line by line and point out any irregularities or other points of interest of which you should be aware.
  • He will coordinate with the Notaire or both Notaires, which will relieve you, the buyer, of that chore and also be much more efficient. 
  • He will advise on such mundane issues as whether your purchase should ultimately be held by your U.S. revocable trust (the answer is decidedly no!), and help you explore how else your planning objectives can be realized.  
  • He will help you understand the current problems in France with short-term rentals. 
  • He will explain the French forced heirship rules (ie, the rights of children) and how to minimize their effect.
  • There are other issues too numerous to raise here, but the reader can see that there is valid justification for why a lawyer should be brought into the picture.  Also, if the lawyer is American, as is yours truly, he understands “where you are coming from” or, better, “where you should be going”.
  • Finally, of the various fees the buyer must pay when purchasing a property – notarial fees, broker fees, possibly bank fees in the case of a mortgage property, the lawyer’s fees are usually based on time spent and, as a percentage of your total transaction cost, are by far the lowest, while his advice is of considerable value he may make the day or save the day for you.

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.