Buying and Financing Property in France
France is blessed with a rich diversity that includes stunning beaches and coastline on its Mediterranean and Atlantic seaboards, spectacular mountain scenery in the Alps, Pyrenees and Massif Central, and a mainly temperate climate. For these reasons, and more, it attracts the attention of Australians and other nationalities looking to either live overseas on either a long term basis or as a regular holiday destination.
Previously, one of the main constraints on purchasing property in France has been access to finance, with many Australian and other expatriates needing to purchase properties on a pure cash basis. Apart from the cash flow impact, this will often be tax inefficient for people renting out their properties for a large part of the year – from both a French and Australian perspective. Australian tax rules allow you to treat offshore properties in much the same fashion as Australian domestic investment properties - with the same qualifying requirements.
With access now available to Euro loans in many situations, potential purchasers have much greater flexibility; although the ability to borrow will vary depending on where you are buying and the type of property you are considering.
The borrowing and negotiation process can be lengthy and complex so remember to allow yourself plenty of time to view properties and locations. Mortgages will be dependent on the specific property being acquired and consequently it will normally not be possible to arrange finance pre-approval from a lender. If you would like us to assist in arranging finance, or any other aspect of your purchase in France, please complete an Inquiry Form and we will respond promptly. In general terms, you should assume a minimum deposit requirement of 30% and a minimum mortgage size of €100,000 - and be aware that French banks place a great emphasis on "serviceability" (for example, typically no more than 30% of your discretionary expenditure can be devoted to mortgage payments).
Please note, however, that at the present time it is difficult/impossible to source mortgage finance for applicants who are self-employed, except in very niche circumstances.
The taxation and legal issues associated with the purchase and ownership of property in France can be complicated, and below we offer only a short summary of the main issues - in the expectation that purchasers will seek appropriate professional advice both in France and their country of residence prior to any purchase, so that they understand the full implications of purchasing property. In that regard, we strongly recommend that purchasers seek both tax and legal advice before initiating any purchase - and we can provide access to English-speaking professionals in that regard.
1. Tax Considerations
Income tax applies to net rental income in France, as in most other countries. Gross rental income can be reduced by interest paid on your investment loan in addition to regular property expenses like maintenance, utility bills, property agent letting fees, etc. Any rental losses can be carried forward to offset against future rental income. Homes used for holiday purposes are not subject to income tax in France, but you also need to check out how tax applies in your country of residence. Note that non-residents owners are generally required to submit a French income tax return in any year in which they receive income from letting property in France.
French homes are subject to two local property taxes, based on who owns and occupies a property as at January 1 annually. The Taxe Fonciere (land tax) is payable by the owner of the land and is calculated on the land size, and the Tax D'Habitation, an occupiers' tax based on a complicated formula which assesses the properties notional rental value and includes a TV license fee where the property is rented out. The rates of tax vary across the country, and depend on individual circumstances - so they need to be individually investigated as part of any purchase process.
In most circumstances, any sale of property in France will be subject to capital gains tax in France and, depending on the precise terms of any double tax agreement between your country of residence and France, you will be able to claim an offset in your country of residence for capital gains tax paid in France. Prior to 2015 a higher rate of capital gains tax applied to non-resident owners who lived outside the European Union. That no longer applies, and non-residents are now subject to the same capital gains tax rates as French residents. That currently (2019) means a basic capital gains tax rate of 19%, plus 17.2% social charges, bringing the confined rate to 36.2%. In addition to the basic capital gains tax rate, a supplementary rate of tax of between 2% and 6% currently applies to "large gains" - effectively gains exceeding €50,000.
Note that if the property is your main or principal residence it will be exempt from capital gains tax, provided it was your habitual and actual residence at the time of sale. For other properties, once a property has been owned for six years, there is a graduated reduction in both capital gains tax and social charges paid on any sale of the property. In relation to capital gains tax, 6% is deducted per year after the first five years of ownership until exemption (Year 22+), whilst social charges are reduced by 1.65% per year until exemption (Year 30+).
France levies wealth taxes (ISF or mpôt de Solidarité sur la Fortune) on the worldwide assets of French residents and the net French assets of non-residents - but it was recently (2017) narrowed to include only real estate assets. Currently, if the household total net wealth is below €1.3M, no wealth tax is due and no return is required. Whilst for those with net assets in excess of €1.3M, the tax applies in tranches beginning at €800K - ranging from 0.5% for an estate between €800,000 and €1.3 million and up to 1.5% for estates exceeding €10,000,000. Note that an exemption from the wealth tax applies - in relation to foreign assets - for a period of five years for those individuals who become French tax residents.
2. Legal Considerations
Inheritance taxes apply in France on specific portions of an individual's estate – generally, that part of the estate left to anyone other than siblings or a spouse. Essentially the law enacts the principle that you "cannot disinherit your children", with up to four children able to receive 75% of the estate tax-free, with the remaining portion tax free if left to your spouse, with taxes of between 40% and 60% applying to assets distributed to anyone else.
It is important, if not essential, to obtain legal advice at the point of purchase of your French property, taking into account the impact of these inheritance and wealth tax laws. The law does currently recognise unmarried couples in terms of favourable treatment on death but the appropriate structure and nominations need to be made at the time any jointly held property is purchased; the structure and legal or tax impact cannot be altered retrospectively.
3. Other Considerations
The French Notaire is engaged early on in the purchasing process and their role is central to facilitating the transfer of property ownership according to French law, and in addition they can provide you with advice surrounding how to initially structure the purchase anticipating French inheritance tax issues.
The Notaire is usually local to the area in which you purchase and, from a French legal point of view, they officially act for both the vendor and purchaser. Depending on your particular situation and the amount of your investment, it may be effective to rely on the Notaire's advice and assistance during the purchasing process. However, in other cases appointing your own independent legal adviser would be highly recommended.