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Undoubtedly preoccupied by the excesses of unregulated furnished rentals in Paris and the growth of online platforms like Airbnb, the French Ministry of Finance plans to eliminate or reduce the tax benefits associated with furnished rentals.
The LMNP (non-professional furnished rental) program allows for tax deductions for depreciation on real estate, improvements made to the rental property, and furniture. It is this depreciation that constitutes the main tax incentive (in addition to the deduction of loan interest and acquisition costs) and increases the profitability of the investment.
One potential reform currently under consideration would address the method for calculating capital gains upon sale. The capital gain on the sale of a property under the LMNP scheme is currently calculated as a “private” capital gain, that is, by comparing the sale price to the purchase price and applying time-based deductions to any resulting capital gain. Depreciation previously deducted from income is not added back.
The tax authorities are therefore considering changing this and re-including the previously deducted depreciation in the capital gains calculation! However, managed residential properties consist of many small co-owner landlords who have leased their properties under a commercial lease to a single operator! In reality, these co-owners are often unable to hold onto their property for more than 10 or 15 years. They are frequently forced to sell, if not during the first lease term, then at least after a renewal that is often disappointing.
“What the owner has saved thanks to LMNP status would then be recouped almost in full at the time of sale.”
Ultimately, any LMNP property resold at a price equal to or even lower than its original purchase price would be subject to capital gains tax upon sale. The savings the owner realized through LMNP status would then be recouped almost in full at the time of sale. A resold “furnished” property would thus no longer offer any advantage over an unfurnished property purchased and rented out under the standard real estate tax regime. This measure will further reduce the appeal of investing in managed residences. Indeed, properties of this type do not appreciate in value over time—and, more importantly, are unlikely to do so in the future. Excessive sale prices at the start of operations, followed by downward rent adjustments—which are common upon lease renewal— the risks of rapid obsolescence for high-use properties (such as nursing homes) subject to evolving standards, and the need for major renovations—rarely anticipated at the outset—have, in recent years, dispelled any illusions of “real” capital gains for LMNP investors. In the event of a resale after a few years (an option often chosen by those disappointed by their hopes for capital gains), at least the tax benefit of the depreciation deduction remained. That would no longer be the case: if officials at the French Ministry of Finance, frustrated by abuses in the Parisian furnished rental market, change the rules, LMNP investors in managed residences will quickly discover that they are now trapped in a worthless investment, in which they are bound to lose money no matter what!
“The outlook is growing even bleaker for investors in managed residential complexes.”
A second proposed reform concerns rentals under the “micro-BIC” (industrial and commercial profits) regime. The proposal would be to lower the flat-rate deduction—currently 50%—to 30% if income is less than €15,000. For example, a landlord receiving €14,000 in rent per year would then be taxed on €9,800 in BIC income instead of €7,000, resulting in a tax bill of €2,940 instead of €2,100, at a marginal tax rate of 30%. Finally, a variation on this reform, also under consideration, would involve aligning all tax regimes—both furnished and unfurnished rentals—by creating a single 40% deduction. This would further diminish the appeal of furnished rentals.
In short, the outlook is growing even bleaker for investors in managed residences. When their cynical operator wanted to lower the rent—which had originally been set too high to justify an excessive sale price—they would point to significant tax benefits. What will remain of these benefits in a few months? Who will want to buy a used property of this type, and at what price? What will become of the secondary market for these properties? Who, if they’re well-informed, would buy a new property with a gross return limited to about 4%?! Yet the tax benefit is currently used as a pretext to sell this type of property, even with such a low gross return and despite the significant risks involved: non-payment of rent—a common occurrence in business or tourist residences—risks of obsolescence and termination at the end of the lease term with no possibility of repurposing the property (into a nursing home, for example), and a widespread risk of downward rent adjustments upon lease renewal…
We urge investors in managed residences to think carefully—or even to walk away without looking back… Because such an investment, which is already lackluster today, could soon become completely unattractive. Unless, that is, the French Ministry of Finance (Bercy) reads this article or listens to those who, like us, defend LMNP investors year-round. For these investors, life is not the “long, peaceful river” that the enticing brochures promise them while emphasizing the security of the investment!
