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Summer holidays, back-to-school, sporting events... All these periods are conducive to the search for furnished housing. For owners, managing the taxation of a furnished rental can quickly become complex. While rental is a civil activity, when applied to the provision of furnished housing, it becomes a commercial activity for tax purposes! This explains why the income is taxed under the category of industrial and commercial profits (BIC). How should this be properly reported to the tax authorities?
What is Furnished Rental?
It involves providing a dwelling for residential use for either a short or long period. The property must be equipped with at least the 14 items listed by Decree No. 2015-981 of July 31, 2015, which defines the list of furnishings for a furnished dwelling: bedding with a duvet or blanket, shutters or curtains in the bedrooms, stove, oven or microwave, refrigerator, freezer or freezer compartment with a maximum temperature of -6°, enough crockery for the occupants to have meals, cooking utensils, table, chairs, storage shelves, lighting fixtures, cleaning equipment suited to the characteristics of the dwelling (vacuum cleaner/broom/mop...).
Note: The rental of equipped offices is also considered as a furnished rental activity.
Two Possible Regimes: Professional or Non-Professional Furnished Rental
There are two types of furnished rental regimes: professional furnished rental (LMP) or non-professional furnished rental (LMNP).
Criteria for both regimes according to the tax applied:
| Professional Furnished Rental | Non-Professional Furnished Rental (LMNP) | |
|---|---|---|
| Conditions | For income tax purposes, the furnished rental activity is considered professional (LMP) when the following two conditions are met: 1. The annual gross receipts from this activity for all members of the tax household must exceed €23,000. 2. These receipts must exceed the other income of the tax household. If one of these conditions is not met, the rental is considered non-professional (LMNP). | If the conditions for LMP are not met, the operator engages in a non-professional furnished rental activity. |
| Taxation of income | The income from furnished rental is taxed under the category of industrial and commercial profits (BIC), either under the micro-BIC regime or the actual regime. It is possible to opt for the self-employed status with the lump-sum income tax (IR) payment to social security agencies as provided in article 151-0 of the CGI. | The income is taxed under the category of non-professional industrial and commercial profits (BIC). |
| Treatment of Deficits | Professional BIC deficits can be offset against global income without limitation. For investors seeking tax optimization, generating a tax deficit is often desirable. This opportunity allows the application of the rules for determining results under the actual regime (expenses like acquisition costs and depreciation of construction can be deducted). | They can only be offset against the income from an LMNP activity over the next 10 years. |
| Regime Applicable to Professional Capital Gains | to Professional Capital Gains Total exemption from income tax and social security contributions, provided the activity has been carried out for at least 5 years and the average annual gross receipts of the closed financial years are below €126,000; otherwise, partial exemption applies. | Total exemption if the property has been held for more than 22 years (Income tax) and 30 years (Social contributions), with partial exemption: The reduction of the gross capital gain is calculated in stages. Partial exemption: The reduction of the gross capital gain is calculated in stages. |
| Wealth Tax (IFI) | Properties are exempt from Wealth Tax (IFI). The conditions for qualifying as LMP for IFI differ from the LMP conditions for income tax. | The Wealth Tax on Real Estate (IFI) is due according to the rules applicable to companies holding real estate / direct property owners. |
The Advantage of the Micro-BIC Regime
In the case of non-professional furnished rental (LMNP) and if the receipts do not exceed €72,000, it is possible to opt for the micro-BIC regime if the actual expenses, including depreciation, represent less than 50% of the receipts. This regime allows a 50% flat-rate deduction on the collected receipts with no formalities. This regime can be advantageous for seasonal rental properties in areas where real estate prices have not "skyrocketed," provided the number of rental weeks is very low and the deductible expenses are therefore also low.
The Pitfalls of the Actual Tax Regime
The actual industrial and commercial profits (BIC) regime requires maintaining accounting records and filing a separate declaration from the income tax return. It only makes sense if the resulting profit is below 50% of the receipts, as otherwise, the micro-BIC regime would be more advantageous! The regime requires depreciation of the property to be recorded in the accounts.
Unlike a building, land does not depreciate. It is also important not to calculate the depreciation of the property systematically and to allocate the correct proportion between the land and the construction. In fact, the tax authorities pay close attention to the value of the land.
Regarding the land portion linked to the real estate, it is advisable to analyze the local real estate market to determine the value of the land. This value is comparable to that of a building plot for similar location and size:
For example, a building plot in Corrèze sells for €15/m². For a house worth €150,000 with a 100 m² area, the land portion represents 10%.
For a Parisian apartment, determining the land portion is much more complicated, as there is no available land for building. The valuation of the co-ownership, geographical location, and many factors help determine the land portion, which remains much more subjective due to the absence of comparable land sales.
Points of Caution for Taxpayers within a Household
When the same household owns multiple furnished rental properties, it is important to note that the properties owned by the same individuals (Mr. alone, Mrs. alone, or joint ownership) must follow the same tax regime: a single tax regime per operator within the household. The tax authorities require a unified tax regime per property operator within the household. Therefore, it is possible that the rental regimes exercised separately by each individual could differ: Mr. under the actual BIC regime and Mrs. under the micro-BIC regime.
In a tax environment that requires mastery of various legal and fiscal concepts, it seems wise to compare the applicable regimes for each situation to determine the most advantageous one for each taxpayer.
Details on Creating a Company for Your Real Estate Portfolio
It may be wise to use a company for managing a furnished rental business. The transfer of assets while maintaining control and management of real estate properties is one of the main advantages of this legal structure (in case of financing by debt, consider transferring shares quickly to benefit from a reduced share value; managing a real estate portfolio homogeneously in case of multiple shareholders). The company forms best suited for a furnished rental activity are commercial companies (SARL, SAS, SNC).
Special Case: Affiliation with the Self-Employed Workers Regime
Since January 1, 2021, anyone engaged in the rental of furnished residential premises whose annual receipts for all members of the household exceed €23,000 is affiliated with the self-employed workers' regime (Social Security for Independents) as long as one of the following conditions is met:
- The properties are rented out for a short period, and the tenants do not make it their main residence.
- The BIC LMP receipts exceed the other income of the household subject to income tax (salaries, manager's income, pension, other BIC, BNC, BA).
This provision obviously applies to non-residents who often have rental income from furnished properties as their only taxable income in France. It should be seen as a way for some operators to qualify for retirement quarters.
Taxation: Furnished Rental Ineligible for the Dutreil Pact
The tax authorities have ended the debate: furnished rental is no longer an activity eligible for the Dutreil Pact, as provided in the doctrine. The tax administration's position is binding on taxpayers starting from April 6, 2021.
RSM can assist you in managing the tax aspects of your rental investments.
