Last week, (8th September 2011), the French parliament voted in new rules for Capital Gains Tax (CGT). Though waiting ratification by the Senate, it will become law and apply to the sale of property, not used as principal residence, after 1st February 2012.

The applicable tax rate for gains on real estate will depend upon your country of residence for taxation purposes. In all cases the tax is applied at the time of the sale in the offices of the notaire, and will be deducted from the sale proceeds before the net cheque is handed over.

Currently, when a property is sold in France, there is 10% reduction of the tax bill each year following 5 years of ownership. This means that no tax will apply after 15 years ownership.

EXAMPLE 1 ~ Existing CGT regime for tax to be paid on a EU but non French resident, 2nd home valued at €100,000 ...

Yr 1-5 = €19,000 (19%)

Yr 6 @ 90% = 17,100

Yr 7 @ 80% = 15,200

Yr 8 @ 70% = 13,300

Yr 9 @ 60% = 11,400

Yr 10 @ 50% = 9,500

Yr 11 @ 40% = 7,600

Yr 12 @ 30% = 5,700

Yr 13 @ 20% = 3,800

Yr 14 @ 10% = 1,900

Yr 15 @ 0% = Zero

From February next year, New CGT changes are ...

The effect will be to raise the tax rate for French residents by 1.2%, (31.3% to 32.5%).

 

If we assume the current rate remains the same (19%) for EU but non French residents (as they do not pay the social tax charge), the following applies ...

EXAMPLE 2 ~ NEW regime for EU non French residents for CGT to be paid on a 2nd home valued at €100,000 ...

Yrs 1-5 = €19,000 (19%)

Yrs 6-15 €18,620 reducing to €15,200

Yrs 16-25 €14,440 reducing to €7,600

Yrs 26-30 €6,080 reducing to €380

After 30 yrs Zero CGT

As you can see, this NEW CGT liability increases the tax bill you will pay and introduces a significantly longer liability period too.

An acceptable way to avoid paying CGT however, would be for the owner to inhabit the property to be sold as principal residence for a few years prior to selling  and is subject to the approval of the French tax office. 

In the short term ~ French property owners, who have owned for at least 15 years, will try to sell before the end of October 2011 to avoid paying the new CGT. This is because it usually takes 3-months between the sale agreement and the signature with the Notaire i.e. expected completion before 1st February deadline.

 

Good news for buyers as this may increase the number of properties coming on the market and therefore reduce the asking prices at least until the 31st October 2011. 

In the longer term ~ Properties that haven't sold before the deadline (Notaire signature before 1st February 2012) may be taken off market as owners sit back and wait a few years more to attract reducing tax liability.

People who do not have to sell, will wait even longer and be even less incline to reduce an asking price, may have the reverse effect on the market by decreasing available stock and raising market prices.

September, October and the beginning of November are the best months to buy a French property as many owners will want to sell cheap ahead of the notarised transaction before the 1st February 2012.

1. Keep in mind the deadline of 1st February 2012, as a buyer will have to sign the "Compromis de vente" 3-months before completion as French Notaries are not noted for their speedy administration.

 

2. Notary offices will be especially busy during this time with the anticipated extra load of property transactions.

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