Real Estate investments in France are the cornerstone of building wealth because they allow investors to take advantage of the leverage of credit. The investor need to set goals in order to choose how it is wiser to invest money. Purchase of a principal residence? Investment in Real Estate offering tax benefits? Receive regular income without the constraints of management?
For each of these objectives, there is a suitable French tool. It can be a classic rental investment, a furnished flat in a residence of service, or even the purchase of REITs shares.
- Tax-efficient Real Estate investments
- Furnished Properties: Classic leaseback
- The yielding of REITs
- Optimisation tools: credit and dismemberment
Table des matières :
- 1 The tax-efficient real estate investments in France
- 2 Furnished Properties/Real estate (French LMNP) : Classic leaseback
- 3 The yielding of REITs (French SCPI)
- 4 Optimisation tools: credit and dismemberment
- 5 What to remember about real estate investments
- 6 For your savings, ask the help of a specialist!
The tax-efficient real estate investments in France
Rental real estate investments offering a tax exemption have the characteristic that will be of interest if the investor can take the maximum tax advantage attached to them. In this sense, their use in a construction phase of the heritage is not always the optimal choice.
This is for example:
- The Duflot law can reduce the tax liability up to €6000 per year, for 9 years,
- The Malraux law that provides a tax reduction ranging between 22% and 30 % of the value of the property restoration work,
- The Historical Monuments Act enables to tax-deduct your total income,
- The real estate « Girardin » is regarding investments in overseas territories
We’ll content ourselves here with this brief presentation, further analysis is carried out here : Tax reduction on income through real estate investments
How to invest in tax-efficient investments?
All tax-efficient arrangements should be approached with extreme caution. The tax reduction is certainly an important feature, but it is important not to ignore the other elements of this investment.
Particular attention should be given to each item of the case: choice of financing, choice of the developer, choice of the program, or the location of the property and market potential.
It is imperative to call a trusted professional who will take the time to select the right programs, the good intermediaries, and who will commit to your side.
Why invest in french tax-efficient investments?
This type of investment can be interesting if it is accompanied by a genuine need in the granted tax advantage.
Being able to make the real estate transaction on credit can build assets financed by the rents.
Real estate investments provide protection against inflation and can generate additional income.
Furnished Properties/Real estate (French LMNP) : Classic leaseback
The furnished rental is to invest in a property that will be rented furnished for short periods. For tax purposes, this activity and the income derived from them are considered business profits (BIC) which gives them certain advantages.
The major advantage of the furnished rental scheme is to redeem the purchase value of the property, with the rents received. In other words, each year a fraction of the value of the property shall be included in the received rents, which allows to reduce taxation.
This measure, in addition to being able to deduct interest on loans taken out to purchase the property, the investor can estimate to being able to collect during many yearst (about 20 years) tax-deductible rents.
How to invest in furnished real estate?
Either the operation is performed directly by the investor, or he/she invests in homes, which are managed by professionals. It may be, for example in nursing homes, in student residences, or in residential hotels… In this case the investor completely discharge himself/herself from any management worries. As always, the intermediaries and the programs must be chosen with utmost care.
Similarly, it is advisable to perform multiple simulations to determine the best solutions for financing the project.
Why choose this type of real estate investment?
The furnished rental arrangement can receive tax-free income for many years.
It is also an excellent solution for those who want to invest in real estate without having to deal with any management .
The yielding of REITs (French SCPI)
Buying shares of performance REITs is to buy shares in a company that manages a large fleet of mostly professional real estates.
The investor will receive rents depending on the number of units acquired and the profitability of the real estate. In addition, he/she may, at any time, get rid of the investment in making the resale of the shares.
How to invest in REITs?
The shares of REITs are easily accessible, the value of a share is usually a few hundred euros. And although it is generally not advisable to invest less than €10,000, it is well below what is required for a traditional real estate investment.
To maximise performance, it is better to invest on credit. The interest on the loan will be deducted from the rents, which allows the tax reduction.
The banks are trying to impose on people wanting to borrow their own more or less efficient REITs. It is important to note that it is perfectly possible to find credit financing without having to suffer the dictates of the banks in the choice of REITs.
Why invest in REITs?
Investing in REITs enable to be positioned on a market, which otherwise is difficult to access: professional real estate. It is most often huge areas that require heavy investments.
Being invested in REITs can minimise the risks to a maximum. Each REITs has many buildings, in all territories, rented by hundreds or thousands of tenants.
Over the past six years the average yield of REITs is 7%, well beyond the traditional real estate investment, without the management worries!
REITs can be used to boost the cash flow of a company, it is even a great solution because it is depreciable accounting wise.
Optimisation tools: credit and dismemberment
To optimise a real estate investment, two main levers are available to the user. It is the use of credit and / or dismemberment.
The characteristics of credit
- The credit allows an investor to benefit from leverage while greatly reducing its tax
The lever acts in two ways. The definition in the strict sense of the term means that there is a lever from the time the investor has the choice between cash buy or borrow, and to the extent that the remuneration of invested capital is worth more than the cost of borrowing.
However, there is also another lever which is to allow an investor to receive income from an investment that could not be afforded without the use of credit.
- The use of credit is also particularly attractive in terms of taxation
Under a rental investment, rents are taxable income. This tax is costly for investors who will incur all the profitability of their investments.
Buy credit can deduct from the rental income received, the interest on loans. Depending on the characteristics of the real estate transaction, that will result in a reduction or a cancellation of the tax normally due on rents.
The characteristics of the dismemberment
The dismemberment is to divide the ownership of a property for a specified period (5 or 10 years for REITs), or for life. ,On one side we’ll find a bare owner, and on the other a usufructuary/beneficial owner.
- The beneficial owner buys the right to use the property, to rent it, and to collect revenues.
- The bare owner is the person who will recover full ownership of the property at the end of the usufruct/life interest.
The purchase price of the usufruct and bare ownership depend on the duration of the dismemberment.
The advantage of the bare owner depends on several factors. It will be on the resale of the property, depending on any capital gain. It can also count on a tax gain to the extent that the bare owner does not collect rents, it may deduct from its other property income, interests of the loan for the acquisition, and does not recognise the value of the property with regards to the tax on wealth (ISF). The purchase of the bare ownership allows finally to invest in a property that would otherwise have been out of financial reach of the investor.
The economic benefit to the usufructuary is that it receives 100% of the income of a property he only paid a small percentage of its actual value. For the usufructuary the gain is immediate, but it does not receive anything at the end of the dismemberment. It is, for example, to buy the usufruct over 5 years of shares of REITs worth €50,000. For this, the investor pays 21% of the freehold valu, which is €10,500, and collects for 5 years 100% of annual income worth €2,500, for a 5% yield. To maximise the profitability of the operation, the investor must be in the low tax brackets.
What to remember about real estate investments
- Credit is the easiest way to build wealth.
- The deductibility of loan interest allows to reduce tax on rents.
- Tax-efficient investments should be used with caution.
- Real Estate investments in residences of services and REITs allow to get out of management constraints.
- Investments in REITs with credit and/or dismemberment, offer better returns.
- In case of doubt, it is always better to be accompanied by a professional.
For your savings, ask the help of a specialist!
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