YOU ARE A TAX RESIDENT IN FRANCE
As an individual taxpayer, all the income from your holiday rentals is subject to income tax. You are either considered to be a professional renter or a non professional renter.
The professional renter benefits from a number of tax breaks with regard to capital gains tax and wealth tax. However, it isn’t that easy to be considered a professional renter. Three conditions have to be met simultaneously:
- At least one member of the tax household must be registered as a professional renter with the company register,
- The gross income from this type of rental must exceed 23 000 € annually,
- The gross income from this type of rental must exceed the sum of all the other professional income earned by the household (salary, self employed income…).
Even if is fairly easy to exceed gross rents of 23 000 € each year (especially on the Ile de Ré), it is hard for those who are still working to meet the third condition. If you don’t meet all three conditions at once, you are automatically considered to be a non professional renter.
Whether you are a professional or non professional renter, the income from your holiday let must be declared on your income tax return as income from a trade or business. While income from unfurnished rentals is taxable as ordinary rental income, income from a furnished let is considered to arise from a trade or business. The income is taxed on a fixed basis (“micro BIC”) or on the basis of actual expenses incurred (“regime reel”).
If your gross rents for the year do not exceed 32 600 € (2012 limit), you can be taxed according to the fixed « micro » regime. In this case, instead of deducting your actual expenses, you are granted a 50% deduction to cover those expenses. As a result, you are taxed on 50% of your gross rental income. There are several advantages to the “micro” system:
- It’s very simple - you declare your gross income and that’s it! The administration takes care of applying the 50% deduction,
- If your actual expenses are low, the « micro » system allows you to be taxed on a lower amount,
- You don’t have to fulfil any particular accounting requirements apart from a list of your income by date and amount to be kept in case of audit.
If your income exceeds the 32 600 € annual threshold, you are taxed on your actual income less actual expenses. Similarly, if your actual expenses are higher than 50% of your rental income, it may be in your interest to opt out of the “micro” system. Project your income and expenses over a few years to see which regime is better for you in the long run.
You may have heard of different limits and deductions applying in the « micro » system for furnished rental income. Indeed, if your rental property has been categorized as a furnished tourist let (“meublé de tourisme”) after applying for this status at the prefecture, or if it can be considered a country gite (“gîte rural”) as a result of a different procedure, as long as your gross rental income from these properties doesn’t exceed 82 500 €, you are granted a deduction of 71% (instead of 50%) which is deemed to cover your expenses. This regime is very favourable, especially if you no longer have interest income to deduct and low other expenses, but it requires you taking the necessary steps with the préfecture and other organisations.
If your annual furnished rental income exceeds 32 600 € (82 500 € in the cases described above), or if your annual income is less than 32 600 € but you don’t wish to be in the « micro » system, you are subject to tax on actual income less actual expenses. This implies a appropriate bookkeeping and the filing of a profits and loss return (form 2033) before the beginning of May with the corporate tax centre for the area in which your property is situated (La Rochelle Ouest for the Ile de Ré). The net income or loss is then carried to your annual tax return.
The main expenses you can deduct are:
- Setting up costs such as notary fees,
- Maintenance, improvements and repairs,
- Local taxes,
- Management and agency fees,
- Mortgage interest,
- Wear and tear,
- Depreciation of the cost of the buildings - the purchase price is not a deductible cost but must be amortized over the useful life of the building, often between 50 and 100 years. Be aware, however, that the actual calculation is more complex than that as each component of the building should be amortized separately based on useful life.
The complexity of this type of calculation means it is probably a good idea to employ a bookkeeper (their cost is a deductible expense) but this implies additional costs for you. It is also important to note that only expenses relating to the period you actually rent the property are deductible. If you rent out your second home for a few weeks each year, you should pro rate your expenses over the time you rent out the property.
Your net rental income, whether you are taxed under the “micro” system or using actual expenses, is added to your other taxable income on your tax return and taxed at progressive rates. As well as completing form 2042, you will also need form 2042C. Gross income taxable under the “micro” system should be put on line 5ND if it is your income and on line 5OD if it is your spouse’s income (page 3 of form 2042C). You should also fill in your and/or your spouse’s name at the top of page 2, along with the address of the rental property and the tax system you are opting for (BIC/micro for the « micro » system or BIC/réel for actual expenses). Net income after deducting actual expenses should be inserted on line 5NK (your income) or line 5OK (spouse’s income).
YOU ARE NOT TAX RESIDENT IN FRANCE
Non residents are taxable in France on their French source income only. French source income includes income from rental properties located in France. Your net holiday rental income is therefore taxable in France and determined using the same rules as for residents. The tax rate on your French source income cannot be less than 20% unless you can prove that you would have been taxed at a lower effective rate if all your income had been taxed in France. In this case, the lower rate applies.
You have to file a tax return each year and, if necessary, a profits and loss return (form 2033). The tax return filing deadline is slightly later than for residents - end of June instead of the end of May. Form 2033 has the same filing deadline as residents (beginning of May).
It is more than likely that your French rental income will also be taxable in your country of residence. In this case, if there is a tax treaty between France and your country of residence, the treaty will provide a method for avoiding double taxation (either a tax credit or exemption from tax in your home country). As France has a vast network of double taxation treaties, it is very unlikely that your holiday rental income will be taxed twice.