Do you own a property in need of renovation work? Concerned about encouraging investors to reduce the ecological impact of their properties, the government has implemented tax benefits. These benefits allow for the completion of certain renovation works. Thus, there are several real estate tax exemption schemes that allow you to benefit from a reduction in your taxes. Such as tax exemption for primary residence renovations or tax exemption for old rental property renovations. This is an ideal solution given that the tax rate continues to increase and can reach up to 50% of rental income. Discover the assistance available to you and how to implement it.
Tax Exemption through Property Deficit
Property deficit is a real estate tax relief tool that allows for a reduction in tax liability within the framework of rental investment. Under the actual regime, certain expenses incurred for managing your rental property are deductible from your rental income, such as real estate agency fees or condominium charges. Naturally, the cost of most renovation works on your property can also be subtracted from your rental receipts to decrease your tax liability.
Property deficit occurs when the amount of expenses related to renovation works exceeds the amount of rents collected in the year. This deficit is deductible from your taxable income, up to €10,700 per year, and any surplus can be carried forward for 10 years. This mechanism accepts works without spending limits. Only renovation works related to maintenance, improvement, or repair of the rental property are eligible for the scheme.
Introduced by the Balladur law in 1993, property deficit was established by the government to encourage investors to choose old properties in need of work. It is an ideal solution for renovating the French rental housing stock at a lower cost while offering attractive tax benefits to taxpayers.
Suppose you have an old apartment generating an annual income of €10,000. You decide to carry out some electrical installation work costing €14,800. To determine the property deficit, you start with your taxable rental income and subtract the cost of the works, resulting in -€4,800. You can then deduct this amount from your taxable income.
Tax Exemption through the Denormandie Scheme
The Denormandie law is a real estate tax exemption scheme dedicated to the acquisition of old properties requiring renovation works before being rented out. It allows you to benefit from a significant tax reduction.
Like any other tax incentive scheme, the Denormandie law requires a number of conditions to be met in order to benefit from its tax advantage.
Investment in a Property Located in an Eligible Area
The Denormandie law is accessible for old properties located in areas with high rental demand. Currently, 230 municipalities in mainland France and 15 cities in the Overseas territories are eligible for this scheme, areas with high rental demand.
Investment in a Property Requiring Works
The Denormandie law requires investors to acquire an old property requiring renovation works. It is similar to the Pinel law. You must undertake refurbishment operations on the property based on a minimum of 25% of the total investment cost. This investment cost, consisting of the sum of the property purchase price and the cost of the works, is limited to €300,000. The works eligible under the scheme include :
∙ Renovation ;
∙ Modernization ;
∙ Sanitation ;
∙ Development and creation of living spaces ;
∙ Improvement of energy performance (e.g., attic insulation, wall insulation, boiler replacement, etc.).
The works must improve the energy performance of the property by at least 30%.
Tax Reduction under the Denormandie Law
Similar to the Pinel law, each rental period corresponds to a tax reduction. For a commitment of 6 years, the deduction rate is 12% of the invested amount, i.e., 2% per year. For a rental period of 9 years, it is 18%, i.e., 2% per year. Finally, for a commitment of 12 years, the tax reduction rate is 21%, corresponding to 2% until the 9th year and 1% for the last three years.
Example of Rental Investment under the Denormandie Law
For an investment of €300,000 (property purchase price + cost of works), you can deduct a significant amount from your taxes thanks to the Denormandie scheme :
∙ €6,000 per year for 6 or 9 years, depending on the rental commitment ;
∙ €5,250 per year from the 10th year onwards, if the rental agreement is concluded for 12 years.
Note that if the deductible amounts exceed your tax liability, you cannot carry them forward to the following year.
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Tax Deduction for Renovation Works :Malraux Law
Established in 1962, the Malraux Law is one of the oldest tax deduction schemes. It allows for a significant tax reduction when investing in old character properties for rental purposes, in exchange for a complete rehabilitation of the building.
Benefits of the Malraux Law
In exchange for a complete renovation of old buildings, the Malraux Law offers a substantial tax reduction on the amount of the works carried out, amounting to :
∙ 30% of the amount of the renovation costs incurred in safeguarded sectors
∙ 22% of the amount of the renovation costs incurred in areas of protection of urban and landscape architectural heritage (ZPPAUP).
Expenses are limited to €100,000 per year, for a maximum duration of 4 years. This represents a tax benefit of €22,000 or €30,000 per year.
Rehabilitated buildings are old character properties, often well located and easy to rent out. Besides the tax advantage, they provide you with comfortable additional income.
Eligibility Conditions for Tax Deduction for Renovation Works
The Malraux scheme is subject to very specific criteria.
Types of Buildings Covered
The property you purchase must be intended to become a residential building only. Thus, you cannot rent it out for commercial purposes. You must commit to renting it out for a minimum of 9 years, within 12 months following the completion of the works.
Works related to the restoration of the property, under the Malraux Law, are highly regulated. These include repair, maintenance, and improvement works, roof reconstruction and exterior wall reconstruction, housing transformation works, etc. However, extension works are excluded from the scheme. Furthermore, to benefit from the tax advantage offered by the Malraux Law, the construction site must be supervised by an architect from the Buildings of France.
The purpose of the Malraux Law is to preserve France's old real estate heritage by encouraging the restoration of old buildings. It thus imposes eligible zones, including safeguarded sectors and Zones of Protection of Urban and Landscape Architectural Heritage (ZPPAUP).
A safeguarded sector is a location with historical, aesthetic, or conservation-worthy characteristics. These sectors exist in a few cities per region, including Paris, Lyon, Lille, Aix-en-Provence, Vannes, Saumur, Cahors, etc. Zones of Protection of Urban and Landscape Architectural Heritage (ZPPAUP), on the other hand, are defined by articles L.431-1 to 3 of the Urban Planning Code. Mulhouse, Espelette, Brioude, and Royat, for example, are listed. The urban and landscape heritage within these zones is protected by a set of rules.