Deductible debts for real estate wealth tax
Newsletter - May 2019
On 1 January 2018, French Wealth Tax, i.e. Impôt de solidarité sur la fortune (ISF), was abolished and replaced with a new wealth tax on real estate, the Impôt sur la fortune immobilière (IFI). Whereas the base for ISF consisted of the taxpayer’s entire wealth, the new IFI only applies to real estate and interests in real property.
The threshold triggering IFI application is determined by the net worth of the household’s taxable real estate assets and is set at €1,300,000. Those real estate assets consist of the property and interests in real property (excluding professional use) owned by the taxpayer or the members of the taxable household:
– built real property (houses, apartments, main and holiday homes, etc.),
– non-built property (farm land, building land, woods and forests, etc.),
– interests in real property (usufruct, right of use, right of a construction lease holder, right of the holder of a real-estate lease-purchase agreement, etc.),
– shares or interests in companies up to the portion of their value representing real property owned directly or indirectly, whatever the company’s legal form and whether or not it is a predominantly real-estate company.
The debts contracted by the taxpayer may be deducted from the taxable asset base provided they exist on 1 January of the tax year and are effectively borne by the taxpayer.
However, some anti-abuse rules have been adopted and prohibit the deduction of certain debts contracted by companies owning real property assets where the value of their securities is taxable. Some safeguard provisions limit the strict application of these rules in certain situations.
This list of non-deductible liabilities has been extended by the finance law for 2019 which adds bullet loans and indefinite term loans taken out by companies.
When the taxpayer (and now companies) has contracted a bullet loan (on which only the interest will be repaid initially, the capital being repaid on maturity), the deduction is limited to the sum of the theoretical yearly payments remaining until the agreed maturity. This amounts to calculating a straight-line repayment over the term of the loan. This rule applies regardless of the date on which the bullet loan was taken out.
The sum of the remaining theoretical yearly payments is calculated as follows: total loan amount – (total loan amount * number of years elapsed since pay-out of the loan / total number of years of the loan).
Example: a company has financed the purchase of a property with a €1,000,000 bullet loan, maturing in 10 years, to be repaid on 30 June 2024. For the 2019 IFI, the debt it may deduct from the value of securities will be: 1,000,000 – (1,000,000 * (4/10)) = 600,000 Euros.
Indefinite term loans
As regards loans for which no definite repayment date is defined (e.g. a shareholder current account), the debt is deductible each year in the total amount of the loan minus one twentieth of that amount per year elapsed since the loan was paid out.
Debt deductibility ceiling
When the market value of the taxable wealth exceeds €5 million and the amount of debts exceeds 60% of that value, only 50% of the portion of debts above this limit is deductible.
Example: an individual buys a property worth €10 million, and finances the acquisition by a personal investment of €3 million and a €7 million loan. The €7 million debt exceeds 60% of the value of the property (€6 million); the excess €1 million (€7 million – €6 million) is only 50% deductible, i.e. €500,000 €. The amount of deductible liabilities is therefore limited to €6,500,000.
This ceiling does not apply to debts where the taxpayer can prove that they were not contracted for a primarily fiscal purpose.
We are entirely available if you have any further queries about the issues discussed in this newsletter or about any other accounting, tax, social security or law related topic.