All patrimony professionals are now asking themselves: should you house your rental investments in a real estate property company (« sociétés civiles immobilières ») subject to corporate tax (« impôt sur les sociétés »)?
Indeed, there are almost only advantages to being subject to corporation tax, rather than acquiring a property directly which is subject to property income tax.
This is mainly due to the tax burden, which is much lower for businesses than for individuals.
- Why is property income (« revenus fonciers ») not a good option?
Whether directly or through a real estate property company subject to income tax (« impôt sur le revenu »), the rents received are added to the current income (« revenus courants ») of the partners (calculated in proportion to their participation in the capital of the real estate property company) and are taxed according to their marginal tax bracket (« tranche marginale d’imposition »).
For taxpayers subject to the marginal rate of 30%, the tax rate is 47.20%, including social security contributions of 17.20%.
By using a real estate property company for corporate income tax, the scenery changes: profits are taxed at 15% up to 38 120€ per year (an amount that few lessors exceed), 28% above that.
The main deduction comes later, when the company distributes its results in the form of dividends.
The partner then suffers the one-off flat-rate levy (« prélèvement forfaitaire unique ») of 30%, including the social security levy.
Although it is possible to subject this income to the progressive scale, this is not only interesting for people with little or no tax liability.
In fact, the shareholder of a real estate property company subject to corporate tax pays virtually no tax during the lifetime of the company.
- What are the possible deductions?
Here is another strength of the corporate tax system.
With this option, you can depreciate the value of the property, that is, deduct part of its price each year from the income received.
For an apartment worth 300 000€, for example, approximately 15 000€ will be deducted from the rent received in the first year.
The SCI will then show a negative accounting result, or very slightly positive, even though the rents are a good source of cash flow.
It will therefore not be taxable, generally for several years.
In addition to depreciation, there are deductions that reduce taxable income, which are much more generous in terms of corporate income tax.
Indeed, lessors subject to income tax can only deduct from their income loan interest, charges and rental repairs, whereas those using corporate tax have much more extensive possibilities.
They also have the possibility to deduct acquisition costs and fees as well as improvement works incurred, for example, for the modernization of an old building.
This further reduces the tax base and thus any tax that may be due.
- What capital gains tax (« impôt sur la plus-value »)?
The situation will change if you intend to resell the property to use the capital for other purposes after a few years.
Holding directly or through a real estate property company for income tax purposes is often less penalizing than holding through a real estate property company for corporate tax purposes, for two reasons.
First, only the actual capital gain (« plus-value réelle ») is taxable, i.e. the difference between the resale price and the purchase price (plus acquisition costs and works).
Secondly, you benefit from an annual allowance that reduces the taxable capital gain. You are exempt from tax on this after 22 years of ownership, as well as from social security contributions after 30 years.
With the real estate property company subject to corporate income tax, the capital gain is calculated directly, with the depreciation deducted from the purchase price.
It will be considered that the purchase price of a property purchased for 100 000€, on which 20 000€ has been depreciated, will be 80 000€.
As a result, the taxable capital gain is always very significant even if the price of the property has not changed.
However, this handicap must be put into perspective.
The purpose of holding a property investment company through a real estate property company for corporate tax purposes is not to resell it and then dissolve it at the end of the term.
It is designed with a view to long-term conservation even if this means selling assets and reinvesting the sums in other purchases, followed, or not, by the transfer of the assets.