How to Reduce Taxation on Rental Income in France?

Jean-Marc Le Prado, co-founder of Qlower, was interviewed on this topic by Guillaume Sommerer in his show “Intégrale Placements” on BFM Business TV.

In this article, Jean-Marc presents some tips to reduce taxation on your rental income.

How to Reduce Taxation on Rental Income? What is the current state of rental yields? Are they declining?

Rental yields are slightly declining, but the erosion is not as significant as many claim. It’s quite challenging to establish an average yield. Generally, we find 2% to 4% gross yield for high-end properties and 4% to 6% or 7% for more standard properties, with some even exceeding these figures!

 

The yield of a real estate asset is generally directly related to its size. The larger the area, the lower the yield, and vice versa. This is because the rent per square meter doesn’t increase at the same rate as the price per square meter. As the rent per square meter decreases with the size of the dwelling, the asset’s yield decreases with its area. Therefore, if you’re seeking higher yields, prioritize smaller spaces.

This yield also depends on the property’s patrimonial value: a mansion on Île Saint-Louis in Paris has extraordinary patrimonial value. 

 

The rent demanded will naturally be very high, but the ratio between the rent and the purchase price will be very low. High patrimonial value = low yield, and vice versa!

 

The yield also depends on the type of product: residential, commercial, offices, warehouses, etc.

 

Everyone wants to increase their rental income and pay less tax on it. How can this be achieved?

The first idea that may come to mind is to undertake renovations. Indeed, carrying out work in a property you own that generates income is often pertinent: the work generates an expense that can be deducted from the rents, leading to a decrease in taxable income, possibly eliminating it entirely, or even creating a deficit in the year the work is done! Less or no income = less or no tax!

Are there specific levels of work that need to be respected?

No. If you spend €250 on work in your property, you can deduct €250 from your rents, just as if you spend €5,000 or even €50,000, you can deduct that amount!

 

If you deduct more in work than you have received in rents, you create a deficit that you can deduct from your overall income, and it’s this deductible deficit that is capped.

 

However, it’s important to note: you shouldn’t undertake work just for the sake of reducing your taxes.

 

Remember that while the cost of the work does generate a tax saving, this saving is by design less than the cost of the work!

The work ends up costing less overall, but it still costs! Some investors renovate their property after each tenant, and that’s not advisable! The work undertaken should allow for an increase in rent or at least maintain it.

If I don't have the energy to carry out renovations, what other tips exist to reduce tax on rental income?

In certain scenarios, switching from an unfurnished to a furnished rental can be quite beneficial. Renting unfurnished properties is subject to property income taxation, which isn’t the most favorable in France! It’s entirely possible to convert this property to a furnished rental and benefit from a more advantageous tax regime.

I rent an unfurnished property. Can I suddenly decide to rent it furnished and impose this change on my tenant?

No, of course not. You cannot call your tenant and inform them that you’re going to provide furniture. However, you can take advantage of the tenant’s natural departure, furnish the property, and then re-rent it as a furnished unit.

 

Does that mean I’ll have two different tax treatments for my rental income in one year—one for unfurnished and one for furnished?

Absolutely! In that year, you’ll have taxation under property income (revenus fonciers) from January 1st until the property is re-rented as furnished, and taxation under BIC (industrial and commercial profits) from that date until December 31st.

There are two possible regimes for furnished rentals: micro-BIC and real regime. Which should I choose?

The calculation is relatively straightforward.

 

  • Micro-BIC: If eligible (i.e., annual rental income excluding charges is less than €72,500), you benefit from a 50% allowance on the rents. This means you’re taxed on only 50% of the rental income.
  • Real regime: You deduct the actual expenses you’ve paid, and—this is key—you also deduct property amortization.
 

If your actual expenses plus amortization exceed 50% of the rents, it’s better to opt for the real regime. Conversely, if they are less than 50%, micro-BIC is more advantageous.

So, that’s the guide for these two regimes. The easiest way to pay less tax is to earn less, isn’t it? (Lowering the rent to reduce taxes)

This is a common mindset in the market. Some landlords deliberately avoid setting high rents to reduce their tax burden.

It’s true that lowering your rent generates less income and therefore less tax. However, the tax savings will be less than the rent differential, so it’s a false economy!

There’s another risk: renting at a price far below the market rate (or renting to a family member at a reduced rate) can result in reclassification as an undervalued rent. The tax authorities could challenge you on this.

Is short-term rental more tax-advantageous?

The tax treatment is the same whether you’re renting furnished on an annual basis or as a short-term rental. Naturally, the property must be suited for it, and you must be aware that you can’t engage in short-term rental as freely as you wish.

We haven’t mentioned the Pinel Law for rental investment, even though it’s designed for this purpose. Why hasn’t it been discussed among the tools to reduce taxes?

We’ve focused on strategies for investors who already own rental properties generating income and who, hypothetically, aren’t looking to make additional investments.

However, if you’re open to new investments, the Pinel Law can be relevant. While it won’t address excess property income, if you’re paying €15,000 in annual taxes, of which €4,000–€5,000 comes from property income, a real estate investment under the Pinel framework could be a good option.

The tax savings won’t apply directly to rental income, but the result will effectively offset taxes related to excess property income.

Is there a better time to invest in Pinel properties, or times to avoid? Should we avoid year-end purchases because we risk buying leftover inventory no one wanted earlier in the year?

Properties that no one wants tend to stay on the market for a long time, often appearing at year-end when investors are eager for tax savings.

However, the most important factor is the quality of the property, not the tax benefits. Whether it’s the beginning, middle, or end of the year, you need to conduct a thorough analysis of the developer you plan to work with, as they’ll deliver the property in a year or two.

  • Will there be demand for rentals?
  • What rent can you expect to earn?
  • Don’t focus solely on the Pinel rent cap—this is the golden rule, regardless of the time of year

How long will the Pinel program last?

Currently, the Pinel scheme is set to run until the end of 2022. If this law were to be discontinued, it would likely lead to a collapse of the French real estate market. It’s therefore highly probable that a new law will replace it.

Can SCIs also help reduce rental income taxes?

An SCI doesn’t allow you to directly reduce rental income taxes. However, there’s a clever approach: you can sell a long-held property with a substantial, low-taxed capital gain to an SCI created for this purpose (e.g., with your children as co-owners).

This strategy allows you to re-leverage the property, generating new expenses that lower the tax burden while retaining a quality asset and addressing estate planning concerns by transferring part of the property to your heirs.

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