The building of report is incontestably a good investment in terms of rental return. But there is one parameter that should not be left to chance in order to succeed: real estate taxation. Of course, not all real estate investors have the same objectives, which will count in the choice of a tax package. Let's take a closer look at how to think about the taxation of an investment property.
Taxation of an investment property: the main systems
For the neophyte who is getting into rental real estate, by acquiring an investment property, it is important to understand some fundamental data. Very often, he will contact a wealth management consultant, a tax lawyer or a chartered accountant to make his choices. Because the purchase of the same property can make or break money: it is therefore not possible to ignore the tax reductions in force, according to the different tax systems.
Buying in your own name or in a company
It is the first element to be well understood in the taxation of an investment property.
When an investor buys a property in his own name, he acquires it "in his own name", as it is commonly called. If he buys a property as a couple, or with several people, this property will be placed under the regime of joint ownership. This is an important point at the time of resale.
The second possibility is to buy in a company such as a SARL, SCI or via a holding company. It implies being at least two people and involves costs at the time of the constitution of the company. It is often the SCi (société civile immobilière) status that is chosen.
Depending on the method of purchase of the property chosen, the taxation of an investment property differs.
A property purchased in its own name will be subject to income tax. Two regimes may then apply. If the owner opts for bare rental, he will be liable for property tax. If, on the other hand, he or she chooses to rent the property furnished, he or she will be taxed under the Micro BIC regime or the real tax regime, under the LMNP status (non-professional furnished renter or professional furnished renter).
The LMNP status corresponds to the status of a lessor considered to be carrying out a commercial activity. He has the choice to be subjected either to the micro BIC regime, that of the industrial and commercial incomes, or to the real simplified regime.
In terms of taxation for an investment property, the first offers the advantage of simplicity. It is also called the micro enterprise regime. It concerns taxpayers whose income is less than 70 000 € per year, including the rents received and excluding incidental income. What is taxed under this tax regime corresponds to the amount of all rental income, from which a flat-rate allowance of 50% is subtracted. The tax authorities apply this allowance directly from the tax return.
However, for reasons of tax optimization, the real system is often preferred. It applies automatically to taxpayers with annual revenues of between €70,000 and €238,000. On option of the taxpayer, it is also possible to benefit from it when the receipts
do not exceed 70 000 €. This system allows to reduce the taxation of a building by deducting from the rental profits many expenses such as the renovation of the building and especially, the depreciation.
Note: Deductible expenses and depreciation are expenses that an owner has to pay, but they differ in accounting and in their nature. Expenses are deducted annually, while depreciation is done over long periods of time. We understand by charges all the small expenses which are under 500 € like the electricity bills, the land tax or the bills of small equipment of housing, the fees of a chartered accountant... But, what makes it possible to alleviate still more the taxation of a building of report remains the deduction of depreciation. They correspond to the loss of value of the estimated property, spread over the whole period of repayment of the loan. Schematically, this loss of value is calculated by dividing the price of the property by the number of years that its financing will last. The amount of the depreciation is thus recoverable each year and makes it possible to amortize the maintenance work undertaken with the purchase of the real estate.
Comparison of 2 common plans
To reduce their taxation by deducting their expenses and depreciation, investors often choose the real regime, or to be imposed on iS by buying through a company. If these 2 regimes present common points fiscally, they do not address however, the same profile of investors.
Investors who rely on the IS regime for the taxation of an investment property want to take advantage of the deductions for expenses and depreciation, but without practicing furnished rental. This is rather an advantage for them, because furnished rental has its disadvantages: higher turnover of tenants, deterioration of the property, installation work... But the advantages of incorporating a company do not stop there. This system allows the transmission of the patrimony to the close relations or to the children much more easily. In fact, an SCi is a company, and it is easier to transfer shares of the company, than a building in its entirety. This is an important point to take into account when choosing the taxation of an investment property.
Nevertheless, the rental profitability is higher with a furnished property and buying a property as a furnished landlord is of interest to investors looking for liquidity and additional income. But the regime has another advantage: it makes it easier to dispose of the rental income, i.e. to get cash flow, unlike the owners of a SCI who have to pay dividends, and therefore pay other taxes for that. Moreover, one detail should not be forgotten when reselling. Investors with LMNP status will not be subject to capital gains tax plus depreciation, which is reserved for SCI owners. An advantage in the line of sight of any investor who thinks about the best possible taxation of a building of report. Because the capital gains tax has a very bad reputation!
The choice of the tax package will therefore depend on the long-term objectives of the investor, in particular if he or she is seeking to build up an estate to pass on. Before investing in real estate, the relevance of the tax choices is therefore defined according to the personal situation of the investor. The support of a professional will help the investor to consider different scenarios in order to finally make his rental investment profitable.