French real estate wealth tax – Impôt sur la Fortune Immobilière – (‘IFI’) was introduced in France in 2018, replacing the Impôt de Solidarité sur la Fortune (‘ISF’). French real estate wealth tax relates to property owned by individuals, and its taxable base includes the net value of the property, i.e. after deduction of liabilities. In this article, we look at the main items that can be deducted as liabilities in the ‘IFI’.
What is ‘IFI’?
The ‘IFI’ is an annual tax that applies to taxable households whose net wealth exceeds 1.3 million euros on 1 January of the tax year. Unlike the ISF, the IFI focuses exclusively on property assets, whether primary residences, second homes, rental properties or land.
Deductions from liabilities
Debts incurred by the taxpayer can be deducted from taxable wealth if they exist on 1 January of the tax year and are actually borne by the taxpayer, his or her spouse, PACS partner or cohabitant and any minor children for whom they have the legal management of the wealth.
Only debts relating to taxable assets, if any, can be deducted in proportion to the part of their taxable value.
The tax authorities believe that debts related to the main residence are deductible in full, but they must not exceed the taxable value of the main residence (i.e. 70% of its fair market value).
To determine the net taxable value, a number of debts can be deducted from the gross property assets. The main deductions allowed are the following:
Property loans: Debt incurred for the acquisition, construction or improvement of property is deductible. It is important to note that only debts outstanding as of 1 January of the tax year can be deducted.
Property loans make up a large part of the debt that can be deducted from the IFI’s liabilities. If the taxpayer has taken out a loan that allows for repayment of the capital at the end of the contract (‘bullet’ loan), the deduction is limited to the sum of the theoretical annual instalments remaining until the end of the contract.
This amount is calculated as follows: total amount of the loan – (total amount of the loan × number of years elapsed since the disbursement of the loan / total number of years of the loan).
In the case of loans where there is no deadline for repayment of the capital, the debt is deductible each year up to the total amount of the loan minus an amount equal to one twentieth of this amount per year that has passed since the loan was paid.
These special deduction rules apply to loans taken out to acquire taxable property or property rights, as well as loans taken out to finance the acquisition of company shares. However, loans to finance construction work are not covered.
Conditions for deductibility
For these loans to be deductible, certain conditions must be met:
Existence as of 1 January: The debt must exist on 1 January of the tax year. This means that the outstanding capital on this date is deductible.
Documentation: It is important to be able to provide appropriate documentation for loans, such as loan agreements, amortisation schedules and bank statements showing the outstanding amount.
Direct use for property: Loans must be taken out specifically for the acquisition, construction or improvement of property included in the IFI’s tax base.
Tax debt: Local property taxes, such as property tax or tax on empty dwellings, can be deducted if the debt is due on 1 January of the tax year.
However, income tax and social security contributions are not deductible. Council tax on holiday homes is not deductible.
Renovation work: Debts incurred to finance renovation, repair or improvement work on the property can be deducted. The work must be supported by estimates and invoices and the debt must be outstanding on 1 January. This means that the invoices are due on 1 January 2024.
Limits and conditions
There are limits and conditions for these deductions:
– Debts between members of the same taxable household or between close relatives (ascendants, descendants, brothers and sisters) are not deductible.
– Debts must be legal and justifiable. Informal or undocumented loans cannot be deducted.
Understanding debt deductions is important to optimise the “IFI” calculation. Taxpayers must be careful to document and justify liabilities to ensure they qualify.
If in doubt, it is advisable to consult a tax law expert for personalised advice that complies with current legislation.
Our Law Firm is at your disposal to help you manage your property assets for ‘IFI’ purposes. Do not hesitate to contact us if you have any questions or would like a personalised consultation.
Med venlig hilsen / Kind regards
Cabinet Nicolas BRAHIN
Advokatfirma i NICE, Lawyers in NICE
Camilla Nissen MICHELIS
Assistante – Traductrice
1, Rue Louis Gassin – 06300 NICE (FRANCE)
Tel : +33 493 830 876 / Fax : +33 493 181 437
Camilla.nissen.michelis@brahin-avocats.com
www.brahin-avocats.com
