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For tax purposes, letting out furnished accommodation is considered to be an industrial and commercial activity.
Therefore, depending on your rental income and chosen status, as a Non-Professional Lessor of Furnished Accommodation (LMNP), or as a Professional Lessor of Furnished Accommodation (LMP), according to the 2009 Finance Act, you get:
► either a 50% allowance through the micro-BIC (tax regime applying to microbusiness) with a ceiling of €32,900 ingross annual revenues,
►or you can opt for a simplified actual declaratory system (LMNP), or you can reduce taxation through the LMP status, or, in cases of very high incomes, you can take advantage of a possible exemption from ISF (wealth tax) and of benefits relating to the regime of capital gains from professional disposals.
However, do not let fiscal requirements put you off your intention to let furnished property. Our team is ready at your disposal to assess the profitability of your assets using different methods - gross and net profitability, IRR (internal rate of return), discounted cash flow -, and to guide you towards the right decisions.
An individual or a company renting out furnished accommodation, according to the nature of the activity and their property portfolio, benefits from one or other of the three tax systems existing under the conditions of law: the microenterprise system, the actual tax system (LMNP ≈ Leaseback), or the status of professional lessor of furnished accommodation (LMP).
Our consultants will answer all your questions on tax issues.
Called “micro-BIC”, it concerns non-professional lessors of furnished properties whose annual income (rentals and charges) does not exceed € 32,900. The tax authorities exercise a tax allowance on these incomes of 50 % of expenses with a minimum tax deduction of € 305. Micro-enterprises are exempt of VAT.
The lessors of furnished property within the micro-BIC system must keep an account book which details the receipts derived from the furnished rentals. They must also be able to provide the tax authorities, when requested, with a yearly summary which provides detailed proof of the corresponding purchases and bills.
When making the annual tax return, you simply enter the gross amount of rents, including all taxes, on the supplementary tax declaration form (Form no. 2042 CK Pro), in the “Non professional Furnishend rentals” section, on the “5 ND” line.
In the case where the property has recently been purchased, it is essential above all that you determine your expense rate, or at least obtain an accurate estimate, if you are not fully experienced in furnished renting. If your expense rate exceeds the fixed rate assessment set by the micro-BIC system, it might be in your best interest to choose an actual tax system (régime d’imposition au réel), in order not to lose the benefit of the VAT tax exemption.
This system is applicable to non-professional lessors of furnished property whose receipts do not exceed € 32,900 or optionally, those whose receipts are lower than € 32,900 and who do not choose the “micro-BIC” system. The actual tax system allows you to be in deficit, contrary to the all-inclusive “micro-BIC” system, where one cannot deduct expenses. With the actual system, in the case of a deficit, if the total amount of the costs exceeds the receipts, for example because of work carried out in the rented apartment, the landlord may deduct the actual amount from the receipts. Fully deductible are the following:
- the amounts paid out to acquire the property: loan interest, fees and commissions, works (maintenance costs, repairs, furniture and furnishings, equipment), insurance, possibly: electricity and gas, telephone, internet…;
- inherent rental costs: advertising, management costs if applicable, professional tax, property tax;
- an annual depreciation based on the purchase price of the property - property tax not included – as a function of the equalization from the tax authorities (type of building, type of accommodation, state of the property). In short, the depreciation for the furnished rental property that is entered among the assets on the balance sheet is calculated as a function of the normal duration of use of the property. It is practised over a long or very long period of time, which represents approximately 2 to 3% p.a. Depreciation may also be applied to the purchase price for the furniture and furnishings and equipment over five years. In this respect, this therefore means that 20% of their value can be deducted. No depreciation is possible if the costs exceed the receipts.
It is necessary to keep all bills and receipts.
The loss can be carried forward, to be used in the current year and the following 10 years, on income of the same kind.
Therefore, if you believe that your costs will exceed 50% of your receipts within the limit of 32,900 €/year, you may choose the actual system.
The fiscal administration grants the lessors of furnished properties considered to be professionals the following advantages: allocation of losses against the overall income, a favourable capital gains system, exemption from the ISF-Impôt sur la fortune (Wealth Tax). However, in order to claim this status, the lessors must satisfy the following three conditions:
- the registration as LMP at the Registre du commerce et des sociétés (Commercial Register) of at least one member of the tax household.
- the annual income taken by the members of the tax household from the professional activity of the lessor of furnished property must be greater than 23,000€;
- the annual income from the professional activity of the LMP must be greater than all the other household incomes combined and submitted on the declaration of income in the following categories: salary and payments, industrial and commercial profits other than those from furnished rental, agricultural profits, non commercial profits, income of managers and associates (cf. Art. 62 of the Code général des impôts - General Tax Code).
Professional lessors of furnished properties are normally subject to the CSG (Social contribution) and the CRDS (Contribution to the refund of social debt) by way of professional income, therefore at an overall rate of 12.7% (see details below). In addition, they are often subject to national insurance contributions (welfare, health insurance, retirement contribution, etc…)
In the same way as for non-professional lessors, the professional lessors of furnished property (LMP) can amortizethe rented property under the same conditions.
The LMP status does not exclusively concern the rental of furnished Parisian apartments, but also tourist and student residences. However, this status may turn out to be complex and is mainly intended for heavily taxed households.
In summary, in this case it is the “réel” system that is applied. The main difference concerns the loss that might be created and which is deductible from all the other incomes.
2 optional systems
"réel" system (subject to conditions)
up to € 32,900
+ € 32,900
loss can be carried forward on incomes of the same type
+ € 23,000
loss deductible from all the other incomes
Whether it be for the “réel” status or the LMP status, using an accountant is highly recommended for the annual declaration of income... the accountant’s fee will be included in your deductible expenses.
In the case of a resale, the LNMP lessor is subject to the capital gains (or capital loss) system for private individuals as per the calculations of the notary public who will withhold the tax on the price of the sale, and transfer it to the tax authorities. According to this calculation method, a property held for more than fifteen years will not generate a taxable capital gain; a 10% standard deduction is applied to the value of the property for every year it is owned beyond five years.
In the case of a resale, the LMP lessor is subject to the professional capital gains system and not to the private lessor’s capital gains system. The following are necessary in order to be entirely exempt from capital gain tax:
- the property must be entered on the balance sheet
- the LMP profession must have been practiced for five years, not necessarily consecutive years
- the income must remain below or equal to 90,000€ (since January 1st 2009)
The exemption is only partial up to € 126,000 (Art. 151 septies of the “Code général des impôts”). The taxable capital gains portion is then calculated by dividing the amount of earnings above € 90,000 by € 36,000 (i.e. the difference between € 126,000 and 90,000).
The incomes drawn from furnished rentals under the three systems: “micro-BIC”, LNMP or LMP are subject to the following taxes:
The “Contribution sociale généralisée”- CSG (General Social Contribution), which is paid with their income tax by individuals resident in France for tax purposes. The CSG is calculated on the net income at the rate of 8.2% as a product of assets and investments; a part of this tax (5.1 %) is deductible from the taxable income of the taxpayer.
The “Prélèvement social sur les revenus de capitaux” (Social deduction on income from capital) is paid under the same conditions as the CSG at a rate of 2.3% of the net income (i.e. 2% + 0.3% in additional deductions).
The “Contribution au remboursement de la dette sociale” - CRDS (Contribution to the repayment of social security debt) also paid under the same conditions as the CSG (General social contribution), its rate is 0.5% of the net income.
The “Prélèvement RSA” (“Revenu de solidarité active” – earned income supplement) at a rate of 2 %.
We should bear in mind that professional lessors of a furnished property are for their part normally subject to the CSG and the CRDS for business income, at an overall rate of 12.7%.
Furnished rentals are exempt from VAT. However, this exemption does not apply to furnished rentals which include services (reception desk, cleaning, supply of linen, breakfast…) on which VAT is charged at 10 %.
Furnished rentals are considered as a non wage-earning business activity, therefore a commercial activity, which makes payment of the Professional tax mandatory (Article 1447 of the Code général des impôts). No furnished rental can escape this. Note: you will only be exempt from the Professional tax which is to be paid each year if you rent out a part or all of your own (primary or secondary) furnished residence.
The amount of the Professional tax is the result of the multiplication of the taxable base, (same rental value of the premises as for the property tax with a 16% tax allowance), by the tax rate set by the district in which the property is located (Form no. 1003 to be supplied before May 1st of the year concerned).
The Professional tax is separate from the income drawn from the rented property. It is paid by the landlord on January 1st. It is limited to 3.5% of the added value for the year concerned (rents received less expenses: works, management charges…), on request and after calculation on the Form No. 1327 STP for the “micro-BIC” system, or Form No. 1327 TP for LNMP’s and LMP’s…
The professional tax is deductible within the framework of the “réel” tax system and the status of LMP.
Unfurnished rentals are not subject to this system.
If you never personally use your furnished apartment you do not have to pay the local residence tax. It is your duty to inform your Tax Office of every incoming and departing tenant since it is their responsibility to personally pay this tax. Within the strict meaning of the Code des impôts, it is the tenant who occupies the premises on January 1st of the tax year who will be responsible for paying the residence tax. Any arrangement to the contrary imposed by a landlord may be rejected by a tenant. No deduction or pro rata is granted by the tax authorities.
The fact that the landlord is responsible for paying the professional tax in no way exempts the tenant from paying the residence tax.
In all the cases of empty or furnished rentals, this tax is to be paid by the landlord on January 1st. It is based on the rental value set by the taxation authorities. New properties are exempt for 2 years.
The Property tax notice includes the tax on rubbish removal. The landlord must pay both these taxes. However, the local tax on rubbish removal forms part of the expenses that the landlord can recover from the tenant as set out in the decree of August 26th 1987.
The landlord can upon presentation of written justification ask for the repayment from the tenant based on the exact amount of time that the tenant occupied the rented property.
If you wish to change from the LMP status to the LNMP status, the most important thing to note is that you will lose the advantage of the deductible losses. You will then not be able to allocate them to your overall income. These losses will only be allocated to profits of the same kind, made that same year and over the following ten years.
On the other hand, the capital gains arising from a resale will fall within the capital gains system covering individuals.