The French Pinel law is one of several laws designed to encourage rental investment and support real estate construction. In the French political landscape, it’s common practice to offer tax breaks to boost the construction of new homes in FRANCE.
The Pinel scheme was presented on August 31, 2014. The law officially came into force on January 1, 2015. It is dedicated to new rental investment but has an environmental and social component. The law is aimed at all French people wanting to invest in a new home, even without a down payment.
The Pinel system was initially designed for the period 2014 to 2017. The Pinel law was renewed for the first time until December 31, 2021, keeping the same conditions and advantages, then a second time with the finance law for 2021, until December 31, 2024. For the next two years, the tax reduction rates have been modified.
- Advantages of the Pinel law
- Long-term rental
The minimum rental imposed by the Pinel law is 6 years. It is also possible to rent for 9 years, and then extend for 3 years, for a total rental period of 12 years. The longer the commitment, the higher the tax exemption rate. Therefore, it can be advantageous to rent your property for as long as possible.
The main advantage of long-term rental is therefore its tax exemption rate, as well as the possibility of generating rental income over the longer term.
- The tax reduction
The Pinel system allows the buyer to minimize their income tax if they buy a new home between January 1, 2014, and December 31, 2024.
The reduction of the tax applies if the property is rented for at least 6 years and falls within the annual investment limit of two properties and 300.000 EUR. The amount of tax savings is determined by the duration of the rental (six, nine or twelve years). If a taxpayer buys housing under the Pinel system in 2022, they will be able to benefit from a tax saving of up to 6.000 EUR per year.
The Pinel law provides for a tax reduction of 12% for a 6-year commitment, 18% for a 9-year commitment and 21% for a 12-year commitment retrospectively.
The initial commitment is 6 or 9 years, renewable for 3 years in both cases. As part of an initial 6-year commitment, a second extension period of 3 years is possible.
- The changes in 2023 and 2024
The Pinel law was extended until December 31, 2024, by the finance law for 2021. This extension is, however, accompanied by changes to the criteria and tax reduction rates. The tax reduction rate for a Pinel investment made between January 1 and December 31, 2023, is reduced to 10.5% for a 6-year commitment, 15% for 9 years and 17.5% for 12 years.
Rates on investments made during the calendar year 2024 have also been reduced. The tax reduction rate is reduced to 9% for a 6-year commitment, 12% for a 9-year commitment, and 14% for a 12-year commitment.
- The eligibility of the Pinel law
The choice of the geographical location of the property is essential in this case.
Before investing in the Pinel law, it is essential to select the appropriate real estate, in particular its geographical location: it must be located in regions eligible for the Pinel system.
If the Pinel project was implemented on French territory, it is above all to respond to the scarcity of housing in the most contentious sections of France. It appeared vital, in this context and for all real estate incentives, to identify the geographical locations where the Pinel law would be extremely beneficial.
It is also important to take into account other elements when you are going to choose your property, which are as follows:
- The population growth of the city in which you wish to invest ;
- The quality of life in the region;
- The economic potential of the region;
- Access to the public transport network ;
- The region in which your future home will be located.
- Compliance with the formalities of the Pinel law
The objective of the Pinel system is to allow low-income families to find housing more easily in places where the average rent is expensive. Therefore, to be able to exempt from tax, the investor must respect the rent ceilings. The Pinel rent ceilings are linked to the Pinel zone in which the property is located as well as to the habitable surface area of the property.
The owner must also rent to people whose income does not exceed a certain threshold. These ceilings allow people with low incomes to have priority access. The ceilings are set according to the number of shares in the tenant’s tax household as well as the zone in which the property is located.
This measure makes it possible to fight against exorbitant rents which would exclude part of the population. Rent ceilings make it possible to limit abuses in certain geographical areas where there are very many tenants and where the demand for housing is very high. Rent caps are intended to make affordable housing accessible to everyone. Thus, French people with low incomes can afford to live in a new apartment.
- Disadvantages of the Pinel law
1.The risks of the Pinel law
Before embarking on a Pinel real estate investment project, an owner must be well informed of all the eligibility conditions imposed by the provision.
These conditions must be met by the owner, the accommodation, and the tenant for the rental investment project to be validated by the tax authorities, that is to say the taxes.
If one of the conditions is not met, the owner will not be able to benefit from the tax reduction from the Pinel system. If one of the conditions is not respected during the commitment period, he may be required to reimburse the advantage already received.
2.The definition of the profitability
Before making any real estate investment, it is essential to determine the profitability of the project. If you want to buy a house with the intention of renting it out and then using it as your own home, this concept will have minimal influence on your choices. If, on the other hand, the investment only aims to purchase a new rental property, profitability must be taken into account from the start of your project to guide you. To determine whether your Pinel investment will make you money over time, start by determining the gross return on your investment, then subtract the fees. You will thus obtain the net profitability of your investment under the Pinel law.
3. The age of the building
New real estate is more expensive than old real estate. New housing is undoubtedly more expensive. There is, however, a very solid explanation for this. First of all, there is VAT. When you buy a new home, VAT is generally 20%. There is no VAT to pay on an old house. Then, a new home is often sold with a parking space or garage. A small bonus included in the overall sale price. Finally, new environmental standards increase construction costs (by around 10%). This explains why new housing prices are higher.
Investors are exploited by sellers. We often hear that developers take advantage of buyers. This is another common misunderstanding. A decree came into force on January 1, 2020, to prevent abuse. It limits developer fees to 10% of the cost of housing.
Non-professional furnished rental
The Non-professional furnished rental (“Location Meublée Non Professionnelle”) status is a simple and attractive investment solution for rental property, enabling landlords to rent out furnished accommodation and benefit from tax advantages.
- Preliminary formalities:
- Registration with the Registry of the Commercial Court (“Greffe du tribunal de commerce”):
As a non-professional furnished rental company, you must register with a business formalities center.
- to obtain a Siret number,
- to make known the existence of this activity,
- indicate the tax regime chosen.
On the other hand, the status of non-professional furnished rental company does not require the creation of a company. Non-professional furnished rental can only complement a salaried activity.
- Prior authorization for change of use:
In certain municipalities, the lessor (professional or not) must submit a request for prior authorization for change of use to be able to rent it for short periods repeatedly to passing customers.
This authorization does not apply when the rented accommodation remains the principal residence of the lessor.
2. Check-in in a furnished tourist accommodation or guest room
Any person (professional or not) who offers furnished tourist accommodation for rental must have previously made a declaration to the mayor of the municipality where it is located.
This prior declaration is not obligatory when the residential premises constitute the principal residence of the lessor except in municipalities where the change of use of premises intended for residential use is subject to prior authorization and if the municipal council in decided otherwise.
The rule is the same if you rent rooms at your home, breakfast included, (bed and breakfast) for one or more nights to tourists.
- The different categories of furnished rental
Furnished rentals can be used as principal residences, occasional rentals, or seasonal and tourist rentals. In these cases, the Furnished leases as the tenant’s principal residence.
- Furnished leases for principal residences are governed by articles 25-3 till 25-11 of the French Civil code (Code civil):
Indeed, the article 25-3 of the French Civil Code specifies that:
“The provisions of this title are a matter of public policy and apply to rental contracts for furnished accommodation as defined in article 25-4, where such accommodation constitutes the tenant’s principal residence within the meaning of article 2.
Articles 1, 3, 3-2, 3-3, 4, with the exception of l, 5, 6, 7, 7-1, 8, 8-1, 18, 20-1, 21, 22, 22-1, 22-2, 24 and 24-1 apply to furnished accommodation.
The present title does not apply to “logements-foyers” or to housing covered by an agreement with the State concerning occupancy conditions and allocation procedures.
The present title does not apply to housing allocated or rented because of the exercise of a function or the occupation of a job, nor to rentals granted to seasonal workers”.
The lease must be concluded for a minimum renewable term of one year. This period is reduced to 9 months for students, with no automatic renewal.
- Furnished mobility leases are governed by articles 25-12 till 25-18 of the French Civil code (Code civil):
Indeed, the article 25-18 of the French Civil Code specifies that:
“Rental charges ancillary to the main rent are recovered by the lessor in the form of a lump sum paid at the same time as the rent, the amount and payment frequency of which are defined in the contract, and which may not give rise to any subsequent supplement or adjustment. The amount of the flat-rate service charge is set according to the amounts payable by the lessor in application of article 23. This amount must not be manifestly disproportionate in relation to the last statement of charges by type, in relation to the frequency of payment of the flat-rate charge”.
This is a short-term lease of furnished accommodation to a tenant who can prove, on the date the lease takes effect, that he or she is on vocational training, higher education, an apprenticeship contract, an internship, a voluntary commitment as part of a civic service, a professional transfer or a temporary assignment as part of his or her professional activity.
The mobility lease is concluded for a minimum of one month and a maximum of ten months and is non-renewable and non-renewable on-professional rental.
- Tax planning
For tax purposes to qualify for non-professional furnished rental status, and not be considered a professional lessor, your rental income must:
- be less than 23.000 EUR per year (for all members of the tax household), or not exceed the total income of the tax household subject to income tax in the following categories: salaries and wages, industrial and commercial profits, agricultural profits, non-commercial profits.
For many years, furnished rental of residential property has been a favored tax-efficient option.
Over time, however, legislators have increasingly tightened the conditions of application, both in terms of tax law and legal regulations.
2. annual revenues in excess of 23.000 EUR, revenues exceeding the total professional income of the tax household.
Regarding the Tax benefits, the concerned has the choice between two tax regimes, the micro-BIC regime, also called flat-rate regime and the real regime. The goal is to choose the best tax regime for your situation, we therefore advise you to carry out simulations.
This particular rental status is becoming increasingly popular with property owners, as it offers a number of advantages. Indeed, this type of rental offers advantages for both the owner and the tenant. The best-known benefit is the tax advantage.
- A rental facility
Furnished accommodation is, most often, rented more quickly. Indeed, this type of rental can allow owners to avoid rental vacancies. This is due to the fact that people looking for furnished rentals are, most of the time, students or people changing professionally or personally.
They will therefore tend to stay in the accommodation for a rather short time. They therefore necessarily have an easier time choosing an apartment. Unlike people who are looking for empty rentals whose aim is to settle in for the long term. They therefore think more about getting an apartment.
2. Flexibility of status
Moreover, this type of rental is a status which has more flexible rental criteria. Indeed, there are differences between empty accommodation and furnished accommodation in terms of the rental contract. If you want to know more about the rental contract for a furnished apartment, click here. The differences are for example the duration of this contract, the duration of the notice period for the tenant and the owner or the amount of security deposit authorized.
All these elements which differ between the two types of accommodation make furnished rental more flexible and therefore more attractive for tenants and owners alike. For example, if we are interested in the length of notice. It is shorter for furnished accommodation for both the owner and the tenant. This allows the tenant to quickly change apartments and it allows the owner to end the contract if things do not go well with the existing tenant.
3. Advantageous rents
This type of rental status allows you to rent your apartment at a higher rent. Obviously, an apartment that has furniture can be rented with a higher rent than an empty apartment. Quite simply because you have invested more, but also because the tenants are ready to pay more for a furnished apartment because they will not have the additional costs of furnishing the accommodation and they will not have to make the move at their arrival and departure.
A furnished apartment rents at a rent 12% higher on average than if it were empty. Of course, thanks to this advantage, you will obtain higher income, but you must not forget that the furniture will wear out and that tenants can also damage it. You will therefore receive higher income, but additional expenses are to be expected.
It is also very interesting to have this type of rental status for the resale of your property. You can, of course, invest in real estate in order to carry out classic furnished rentals and decide to change its function a few years later. You can choose to use your accommodation as a primary or secondary base. When you are an expatriate, this can be interesting if you want to come back from time to time to see your family or if you want to return to France in part of your future life. But you can also choose to resell your property.
A furnished property can sell for a higher price than an empty property. In fact, you can choose to sell your furnished property. You can therefore increase your price. In addition, if you have carried out renovation work in addition to the furnishing, your property may sell for more. This advantage is really one in heritage cities. In heritage towns, the important thing in a real estate investment is resale, unlike in yield towns. In general, when an owner invests in heritage towns, he aims to resell his property at the maximum price.
1. Tax risk
This status is very popular for its many advantages but in particular for its tax advantage. We have explained it to you in more detail just above, but when you are this type of rental your income must be declared in the Industrial and Commercial Profits (“BIC”) (bank identification code) category.
You can then choose between the micro-BIC category and the real category. However, we must still be vigilant regarding the risks that owners may face regarding the tax side. Tax changes and regulatory changes may occur from time to time. These changes can be negative for owners in certain situations. We therefore advise you to be vigilant regarding all changes.
2. Limited depreciation
Depreciation is a significant advantage of this type of rental. However, this is an advantage limited in time. In fact, you can amortize your entire investment over approximately 30 years and the purchase of your furniture over approximately 7 years. But when the depreciation period for your investment is over, you cannot start depreciating again.
The possibility of depreciation is therefore a fleeting advantage. When this benefit ends, your taxable share of your income will therefore necessarily be higher. We therefore advise you to do the calculations carefully to find out if the actual regime is the tax regime that suits you and to find out if this type of rental status corresponds to you.
3. To face of the concurrence
This type of rental status is a very popular status. Indeed, we spoke to you about it a little above, but it is a status which interests more and more owners. This is because it brings many benefits. We talked to you about these advantages in the first part of this article. They are numerous and very interesting for owners. However, due to its success, the number of furnished apartments is constantly increasing in many cities in FRANCE.
You must therefore find out carefully about the location of your property. In some cities, it may be better to rent your property empty. Indeed, if there are too many furnished accommodations in a city and therefore too much competition, you may have difficulty finding tenants. You could therefore face long rental vacancies and therefore a significant loss of profitability.