Capital gains tax rates
The capital gain realized on the sale is calculated by subtracting the purchase price from the selling price. That amount is then reduced by certain expenses, including fees paid to licensed real estate agents (at purchase or sale), notaire fees paid by the seller when he purchased, and certain renovation and improvement expenses. After 5 years of ownership, a seller can either itemize actual renovation expenses, or add 15% of the purchase price to the basis of the property as the value of improvements (even if no improvements were made).
Capital gains tax:
There is no capital gains tax on the sale of a primary residence in France.
For a secondary residence owned either individually or through an SCI, the amount of capital gains owed at the time of sale is determined by (1) the fiscal residence of the seller, and (2) the number of years that the property was owned by the seller.
A base rate of 19% capital gains tax is imposed on the sale of real property by any individual, regardless of his country of residency.
The base amount of tax owed is reduced each year, starting after 5 years of ownership, as follows:
Years 6 through 21: 6%/year
Year 22: 4%. After 22 years of ownership there is no capital gains tax to pay upon sale.
A further 15.5% of the gain realized on the sale is paid to the government as social charges (essentially payroll tax). The social charges are also subject to a reduction schedule, albeit over a 30-year period.
In 2015, the French courts ruled that social charges on the sale may only be collected by French residents or non-EU residents. EU residents outside of France are subject to social charges in their home countries.
When are capital gains taxes paid.
Any tax due is calculated and collected by the notaire at the closing of the sale. A nonresident, non-EU seller who owes tax on the sale is required to take out a guarantee that insures that the correct amount of tax was paid. The cost of this insurance is about 1% of the selling price of the property.
Capital gains tax: deductions
Standard deductions upon sale include
- notaire fees, including stamp duties, paid upon purchase
- fees paid to a licensed French real estate agency
- the cost of qualified improvements to the property. Alternatively, once the seller has owned the property for at least 5 years, he can choose to tack 15% of the value of the property on to the basis, as the assumed improvements on the property. As the definition for qualified improvements is very strict, this is usually a good alternative to take.
As an owner, then, it’s important to keep proper records of all expenses associated with the property to ensure they are accounted for upon sale. In addition, you can itemize any furnishings you leave for the new buyer in the purchase price – an outfitted kitchen, for example – and this amount will not be subject to capital gains tax.
Can you avoid paying capital gains taxes immediately and reinvest the funds in a new purchase?
In the US, property sellers can do what’s called a “1031 exchange”: the seller can defer capital gains tax if he reinvests the funds on the sale in a “like-kind” property. There is no such equivalent under French law. But, for US buyers, two properties both located outside the US are considered “like-kind” for purposes of the like-kind exchange rules under 1031. Taking advantage of that rule will not avoid capital gains tax in France though, but will allow a US taxpayer to avoid additional capital gains tax owed in the US on his French property sale.