11. French Capital Gains Tax

1. Scope of the Tax
2. Exemptions on Sale of Property
3. Allowable Costs on Sale of Property
4. Shares and Personal Possessions
5. Taxation of Building Land
6. Fiscal Representative for Non-Residents
7. Sale of Property Abroad

11.3. Allowable Costs on Sale of Property

The capital gain is determined by the difference between the sale price (less eligible expenses) and the purchase price (plus eligible expenses).

11.3.1. Sale Price

The sale price is the price stated on the transfer, less any fees and other eligible cost incurred by the seller, such as estate agent fees, other mandatory fees, and any costs that may be associated with repossession proceedings.

11.3.2. Purchase Price

The purchase price is the that on the deed of sale, plus notarial costs and stamp duty taxes paid at the time of purchase and incurred by the purchaser.

It also includes certain costs associated with the construction, enlargement or improvement of the property.

This means, of course, that the costs of repair and maintenance cannot normally be taken into account. Just what is 'repair' and what is 'improvement' is not always clear.

As these matters are not precisely defined, in some measure it depends on just what the notaire is prepared to accept as eligible building costs. You may wish to arrange a meeting with a local notaire to discuss the matter.

The relevant legislative clause is contained in Article 150B of the Code général des impôts, where it states that the acquisition price can be increased by:

'4° Des dépenses de construction, de reconstruction, d'agrandissement ou d'amélioration, supportées par le vendeur et réalisées par une entreprise depuis l'achèvement de l'immeuble ou son acquisition si elle est postérieure, lorsqu'elles n'ont pas été déjà prises en compte pour la détermination de l'impôt sur le revenu et qu'elles ne présentent pas le caractère de dépenses locatives. Lorsque le contribuable, qui cède un immeuble bâti plus de cinq ans après son acquisition, n'est pas en état d'apporter la justification de ces dépenses, une majoration égale à 15 % du prix d'acquisition est pratiquée.'

It is given further limited elaboration in the_Bulletin Officiel d’Impôts it states that the acquisition price can be increased by:

4. Dépenses de reconstruction et d’agrandissement. Ces travaux s'entendent normalement de ceux qui ont pour effet d'apporter une modification importante au gros- œuvre de locaux existants, des travaux d'aménagement interne qui par leur importance équivalent à une reconstruction ou encore de ceux qui ont pour effet d'accroître le volume ou la surface habitable de locaux existants (cf. DB 5 D 2224 n°s 27 à 29 et 33 à 38).

5. Dépenses d’amélioration. Les dépenses d’amélioration ont pour objet d'apporter à un immeuble un équipement ou un élément de confort nouveau ou mieux adapté aux conditions modernes de vie, sans modifier cependant la structure de cet immeuble.

Il en est ainsi notamment de l'installation d'un ascenseur, du chauffage central ou d'une climatisation dans un immeuble qui en était dépourvu, de la réalisation de travaux d'isolation, du traitement de l'immeuble contre les insectes xylophages (cf. DB 5 D 2224, n° s 21 et s.).

However, major repairs cannot be added to the acquisition price:

6. Dépenses d’entretien et de réparation. Les dépenses d'entretien et de réparation, y compris les grosses réparations, ne figurent pas parmi les dépenses pouvant être prises en compte pour le calcul de la plus-value.

Elles s’entendent de celles qui correspondent à des travaux ayant pour objet de maintenir ou de remettre un immeuble en bon état et d’en permettre un usage normal sans en modifier la consistance, l’agencement ou l’équipement initial (cf. DB 5 D 2224 n° 1 et s.).

That said, the courts have determined that rewiring a property would be deductible.

So it is clear there are substantial limits to just what works can be included in the cost allowance, a position that is made worse by the fact that DIY works cannot be accepted.

Only those building works carried out by a building professional are eligible, so that if you have undertaken the works yourself, then you cannot obtain tax relief on the costs.

The general evidence suggests that the French authorities are only prepared to accept invoices from building professionals registered in France for property sold in France. This may be a moot legal point, as there are many commentators who consider that bona-fide invoices from companies registered elsewhere in the EU should also be permitted.

You will be required to produce the invoices in support of any building costs. In the event that these are not available then, provided you have owned the property for at least five years, the notaire is able to apply an allowance of 15% on the acquisition price against improvement works on a property (but not land). Note that this is the acquisition price, not the sale price.

This concession applies even though you may not have actually carried out any major works.

11.3.3. Rental Properties

If the property has been previously rented out on a tenancy, and construction or renovation costs have already been granted specific relief against liability to income tax on the rental income, then these costs cannot be taken into account.

The law states that building works are accepted, 'lorsqu'elles n'ont pas été déjà prises en compte pour la détermination de l'impôt sur le revenu et qu'elles ne présentent pas le caractère de dépenses locatives'.

The administrative guidance also states:

'Exclusion des dépenses déjà prises en compte pour la détermination de l’impôt sur le revenu : Sont exclues les dépenses qui ont été déduites, pour l’assiette de l’impôt sur le revenu, soit du revenu global, soit des revenus catégoriels ou qui ont été incluses dans la base d’une réduction ou d’un crédit d’impôt.'

Indeed, it would appear that even those who have adopted the micro tax status for lettings (in which a standard allowance for costs is granted) would be ineligible to claim building costs against tax liability.

Likewise, if you have been granted income tax relief for the installation of energy conservation or other works, you will not be able to set this off against tax liability.

Once again, however, practice around the country does vary. We have heard of cases where sellers have been able to obtain relief on building costs on the sale of the property, despite also having previously obtained income tax relief for the works against rental income.

You need to make enquiries with the notaire, and establish just how much s/he is prepared to accept. However, caution is needed, as in theory the French tax authority could later review this assessment and reduce any reduction granted by the notaire.

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