LMNP deficit: strategies, calculations and tax benefits

What is LMNP deficiency?

The LMNP deficit occurs when, during a fiscal year, the deductible expenses of the furnished rental activity exceed the rental income. These expenses include a variety of expenses related to the management and maintenance of the property, as well as the depreciation of the property and its furniture. The simplified real regime for the taxation of Industrial and Commercial Profits (BIC), applicable to LMNPs, allows this deduction of expenses and depreciation.

The two components of LMNP deficiency

• Deductible expenses: include acquisition costs such as notary fees, agency fees, agency fees, loan interests, condominium fees, management fees, insurance, maintenance and repair work, as well as taxes and expenses related to the operation of the property.
• Depreciation: represents the loss of book value of real estate and its furniture over time. It is an accounting mechanism that reduces the fiscal result, without impacting cash flow.

What is the economic and fiscal advantage of generating an LMNP deficit?

Generating a deficit in LMNP (Non-Professional Furnished Rental Company) is not only a matter of circumstance but can become a wise economic and fiscal strategy. This aspect of the LMNP regime, while it may seem counterintuitive at first glance, has significant benefits for the real estate investor.

Tax benefits

• Long-term fiscal planning: the deficit generated can be carried forward to the following fiscal years. The deficit resulting from expenses is carried forward for 10 years while the deficit resulting from amortization is carried forward without a term limit. This characteristic allows farsighted fiscal management.
• Depreciation strategy: the depreciation of property and furniture can represent a significant part of the deficit. For example, for a 100 m² property purchased at 300,000 euros, generates a fictional charge of 14,400 euros annually in the first years, directly contributing to the deficit.

Note that the amortization doctrine is the responsibility of your accounting partner. At Qlower, HERE for example, the doctrine used is optimized to create a large deficit in the first years, while being legal and ethical.

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The mechanism of LMNP deficiency

The LMNP deficit strategy (Non-Professional Furnished Rental Company) is a powerful fiscal lever for real estate investors, making it possible to optimize their taxation on rental income. The mechanism, once well understood and properly applied, can transform the tax management of your investments.

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Deductible expenses and expenses

At the heart of the LMNP deficit mechanism, deductible expenses and expenses play a major role. These items directly reduce taxable income from furnished rentals, and may include:

• Loan interest : they represent a significant part of the expenses, especially in the first years of loan repayment.
• Maintenance and renovation work : essential to maintain or increase the value of your property and ensure its sustainability.
• Management fees and insurance : rental management fees and insurance premiums (non-occupying owner, unpaid rent) are fully deductible.
• Property tax and condominium fees : they are part of deductible current expenses.
• Acquisition costs : notary, agency, broker fees
• Administrative costs : accounting expenses, telephony, etc...
• Kilometric expenses : travel expenses based on the application of the fuel cost schedule based on the fiscal power of the vehicle.
• Depreciation of furniture and property : a key point to be considered separately for its major impact on the deficit.

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Depreciation as a deficit lever

Depreciation represents the loss in value of real estate and its equipment over time. In LMNP, this depreciation is a deductible accounting charge, although it does not result in a real outflow of money. This makes it possible to generate or increase the fiscal deficit significantly.

• Real estate : generally amortized following division by components. The land share will have previously been extracted. Here is the amortization doctrine used by Qlower:
  
  • Structural work is amortized over 50 years
  • Roof waterproofing is amortized over 20 years
  • The general and technical installation is amortized over 15 years
  • The layout is amortized over 5 years

The work is generally amortized over 10 years and the furniture over 5 years.

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Is LMNP deficiency still beneficial?

While the LMNP deficit offers numerous advantages, its usefulness should be evaluated according to the individual situation of each investor.

Advantages:

• Tax reduction: decreases income tax by neutralizing taxable rental income.
• Deficit deferral: allows the deficit to be carried over to the profits of the following years, up to 10 years, thus optimizing the fiscal burden in the long term.

Limitations:

• No imputability to total income : the LMNP deficit cannot be attributed to the taxpayer's other income categories for 10 years.

Long-term strategy : the benefits are maximized with a view to long-term ownership, which may not be suitable for all investor profiles.

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Calculating LMNP Deficiency: A Step-by-Step Approach

Understanding tax rules can be complex, especially when it comes to calculating the LMNP (Non-Professional Furnished Rental Company) deficit.

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Basic principles for calculating the deficit

The calculation of the LMNP deficit is based on a simple logic: subtract expenses and amortization from rental income. Here are the basic steps:

• List all rental income for the year, including rents and expenses paid by tenants.
• Compile all deductible expenses, which include:
  • Loan interests
  • Management and insurance costs
  • Maintenance and renovation work
  • Property tax and non-recoverable condominium fees
  • Other expenses related to the rental business
  • Acquisition costs
  • Travel expenses related to rental management
  • Administrative and accounting costs
  • Training costs and technical documentation
  • Business property tax (CFE)
• Calculate the depreciation of real estate and furniture. This fictitious charge must be estimated by your accounting partner.
• Subtract the total deductible expenses and depreciation from rental income to obtain the deficit.

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Concrete examples of calculating LMNP deficiency

Let's take the example of a property generating 10,000 euros in annual rental income:

• Rental income: 10,000 euros.
• Deductible expenses:
  • Loan interest: 2,000 euros.
  • Management fees: 500 euros.
  • Renovation work: 1,500 euros.
  • Property tax: 800 euros.
  • Insurance: 200 euros.
  • Notary fees: 10,500 euros.
  • Total deductible expenses: 15,500 euros.
• Depreciation of the property for a purchase value of 150,000 euros: 7,200 euros per year for the first 5 years (then 4500€ for the following 10 years).
• Depreciation of furniture over 5 years for a value of 5,000 euros: 1,000 euros per year.
• Total amortization: 8,200 euros.

The deficit is calculated as follows: 10,000 euros (rental income) — 15,500 euros (deductible expenses) — 8,200 euros (amortization) = -13,700 euros. The investor is therefore left with a deficit of 13,700 euros, which will be carried over to the following years for 10 years.

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Tools and resources to help with the calculation

To simplify the calculation of LMNP deficiency, various tools and resources are available:

• Rental management software : some software like Qlower offer modules dedicated to LMNP accounting, allowing revenue and expenses to be entered to automatically calculate the deficit.
• Depreciation tables : Excel tables or online calculators can help estimate the depreciation of property and furniture accurately.
• Wealth management advisors and LMNP experts : get a simulation by making an appointment with Qlower team experts can be invaluable in optimizing your tax strategy and ensuring that all elements are properly taken into account.

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Tax optimization thanks to the LMNP deficit

Tax optimization through the LMNP deficit (Non-Professional Furnished Rental Company) is a fine strategy, allowing investors to manage their tax burden on rental income.

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Impact of the deficit on the taxation of rental income

The deficit generated in LMNP can considerably influence the taxation of the investor's rental income:

• Neutralization of rental income : the deficit makes it possible to neutralize taxable rental income, thus reducing income tax.
• Deficit report : if the deficit cannot be fully attributed in a given year, it can be carried over to income in the same category for the following ten years, allowing fiscal optimization over time.

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LMNP deficit and tax deduction strategies

To maximize the fiscal benefits of the LMNP deficit, several strategies can be implemented:

• Program energy renovation or maintenance work during years when rental income is high to generate a deficit and reduce taxation.
• Depreciation must be calculated precisely to maximize the deficit so that it is useful in the following years.
• Be sure to report all possible deductible expenses, including management fees, insurance fees, and loan interest.

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Deficiency imputation limit and specific rules

Although the LMNP deficit offers opportunities for fiscal optimization, some limitations must be taken into account:

• The deficit can only be attributed to BIC furnished rental income, and not to the investor's overall income.
• Although amortization is a major driver of the deficit, amortization is subject to precise rules, particularly in terms of duration and rates, which must follow the BOFIP principles to avoid fiscal adjustments.
• The deficit can be carried forward for a maximum of ten years when it comes from deductible expenses, and without limit when it comes from depreciation. This requires long-term tax planning to get the most out of it.

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Management and reporting of the LMNP deficit over the following years

Understanding the conditions, the deferral period and the impact on future taxation allows you to optimize the tax advantages of your rental investments over the long term. Here's a detailed look at these key elements.

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Deficit carryover conditions and rules

The deferral of the LMNP deficit is governed by specific rules that guarantee its proper use:

• The LMNP deficit can only be carried forward to future profits from the furnished rental business.
• Unlike other tax regimes, the LMNP deficit cannot be deducted from an investor's overall income.
• Carrying over the deficit is only possible for investors subject to the real taxation regime (Not applicable to the Micro-Bic regime).

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LMNP deficiency reporting period and practical examples

The period for carrying forward the LMNP deficit resulting from expenses is set at 10 years, thus offering a significant window of time for the use of this fiscal lever:

Example: Let's imagine an investor generating a deficit of 5,000 euros in 2023. If his rental income reaches 7,000 euros in 2024, he will be able to deduct the 5,000 euros deficit in 2023, making only 2,000 euros taxable from his 2024 income. If in 2025, his rental income is 6,000 euros, and there is no new deficit, he will pay taxes and social security contributions (TMI + CSG & CRDS at 17.2%) on all of these 6,000 euros, the 2023 deficit having already been fully used up.

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LMNP deficiency reporting procedure

Reporting an LMNP deficit, although complex, is necessary to fully benefit from the fiscal advantages associated with LMNP status. Here is a step-by-step guide to help you get the most out of the reporting process.

Step 1: Choosing the right tax regime

• Simplified real regime : mandatory if your revenue exceeds the micro-BIC threshold or optional if you wish to declare a deficit. All actual expenses and depreciation are deductible.

Note that the micro-BIC regime does not allow you to declare a deficit and amortize your fixed assets.

Step 2: Identify and calculate deductible expenses and depreciation

• List all charges : loan interest, works, management fees, insurance, property tax, etc.
• Calculate depreciation according to the doctrine of your accounting partner.

Step 3: Complete and submit the tax return

• In the context of non-professional furnished rentals (LMNP), in parallel with the remote transmission of the 2031 package and its 2033 annexes, complete form 2042-C-PRO to declare your tax result. The LMNP deficit, which you can carry forward over 10 years, is entered in boxes 5GA and 5GJ of the 2042-C-PRO form.
• Deadline : generally mid-May for the previous fiscal year (May 18 for the year 2024 as part of an online declaration, May 3 for a paper declaration).

Step 4: Postpone the deficit if applicable

• If you are in deficit, write down the amount that will be carried over to the profits of the following years, for up to 10 years. This point is managed by your accounting partner.

Tips for optimized reporting

• Keep all invoices and supporting documents, they may be requested by the tax authorities in case of an audit.
• Anticipate works and acquisitions; plan them in order to optimize your annual fiscal situation.
• Consult an LMNP expert, especially if you opt for the real regime, the expertise of a professional may be necessary to optimize your declaration and avoid errors.

Impact of reporting the deficit correctly

• An accurate declaration allows you to legally minimize your taxation on rental income, taking into account all applicable charges and depreciation.
• Scrupulously following the declaration procedure protects against the risks of tax adjustment.