Investing in prestige property requires in-depth knowledge of the applicable tax regulations. Property Owners need to master a number of tax aspects in order to optimise their investment while complying with legal obligations. This article looks at the different types of taxation that apply to these exceptional properties, from property tax to wealth tax and the benefits of renovations under the Malraux Act.
Property tax and council tax for prestige properties
Definition and calculation of property tax
Prestigious buildings and homes are subject to property tax, a local tax paid by Property Owners. The basis of calculation is the cadastral rental value, multiplied by the rate set by the local authorities. For high-value properties, this rental value can be significantly high, resulting in a substantial tax. However, certain exemptions may apply, particularly if the property is used for business purposes or under certain conditions of energy renovation.
Council tax: impact on prestige homes
Until recently, taxe d’habitation (council tax) was an annual charge payable by every occupant of a dwelling on 1 January of that year. However, since 2021, this tax has been abolished for the majority of principal residences. Nevertheless, it remains applicable to second homes and vacant properties, which directly affects prestigious residences that are not occupied all year round by their owners or rented out.
Property wealth tax (IFI)
Calculating the IFI: threshold and allowances
Replacing the ISF since 2018, the tax on real estate wealth only concerns real estate assets. Only taxpayers whose net property assets exceed €1.3 million are subject to this tax. The tax is calculated in progressive bands ranging from 0.50% to 1.50%. The net value is calculated by subtracting various debts relating to the financing of the property, repairs, etc. Various allowances may also be applied depending on the nature of the property and how it is used, such as a 30% allowance for a principal residence.
- For example: an owner of a home valued at €2 million with a remaining mortgage debt of €500,000 will therefore have to declare net assets of €1.5 million and will be subject to the IFI.
Renovation tax benefits: focus on the Malraux law
Principle of the Malraux Act
The Malraux Act offers investors a tax reduction for restoring buildings located in certain protected areas. The main aim of this measure is to preserve our historic heritage while encouraging individuals to invest in renovation projects. Two areas are eligible:
- Protected areas (former name): 30% tax allowance
- Zones for the protection of architectural, urban and landscape heritage (ZPPAUP): 22% tax allowance
Procedures and conditions of application
To benefit from these advantages, a number of criteria must be met:
- The property must be located in an eligible area.
- Complete restoration work must be carried out with the prior agreement of the Architecte des Bâtiments de France.
- The property must then be let bare for a minimum of 9 years following the work.
Practical example
Imagine an investor buying a prestigious building in a conservation area for €1.5 million and carrying out renovation work costing €600,000. Under the Malraux Act, the investor would benefit from a tax reduction of €180,000 (30% of €600,000).
Furnished professional and non-professional rentals
Furnished rental: LMP and LMNP schemes
Income from furnished rentals is taxed in two separate ways:
- LMNP (Loueur en Meublé Non Professionnel) status applies when rental income is less than €23,000 per year, or represents less than half the total income of the taxpayer’s household. This income will be subject to industrial and commercial profits (BIC), with the option of depreciating the property to reduce taxation.
- If the rental income exceeds €23,000 a year and accounts for more than 50% of the household income, you will be classified as a “Loueur Meublé Professionnel” (LMP), with compulsory membership of a specific social security scheme and the possibility of deducting certain additional charges and depreciation.
Special tax features of each scheme
Each scheme has its own specific features: – LMNP: simplified administration, ideal for small investors. It is accompanied by interesting possibilities for depreciation of furniture, equipment and works. – LMP: more deductions possible, but with restrictive administrative formalities and rigorous monitoring.
Additional measures and specific tax relief
Historic monuments and participative financing
There are also schemes designed to encourage the protection and enhancement of historic monuments. Such initiatives often offer private investors various tax reductions based on the sums invested in conserving these heritage sites without generating too much taxable rent in return. There are also property crowdfunding platforms offering grouped investment opportunities that are often very lucrative for financing renovations.
Gifts and inheritance: wealth considerations
In terms of inheritance, prestigious residences pose particular challenges because of their high value. There are a number of tax strategies that can be used to organise the transfer effectively: – Early shared gifts: this allows the gift to be split up, thereby avoiding high inheritance tax; – Use of SCIs (non-trading property companies): optimising transfers through the use of shares. However, these techniques require personalised monitoring based on a rule defined on a case-by-case basis.