Real estate investment: a tax lawyer’s view on letting

In 2024, rising interest rates and tighter access to credit, the surge in construction costs and new energy-efficiency standards have put the real estate market under pressure.

Yet demand for housing is not stalling, and real estate investors are turning to letting (furnished letting in particular) encouraged by attractive returns and taxation. This article sets out the income-tax regime for furnished letting (I), then the value of holding through a company (II).

I. The tax regime for furnished letting

A person who lets unfurnished property is regarded, for tax purposes, as earning property income (revenus fonciers), taxed as such. But if the property is furnished, the letting falls under the business-tax regime. It is this regime that is of real interest under French tax law.

Article 35, I, 5° bis of the French Tax Code (CGI) provides that the income of persons who let residential premises furnished, directly or indirectly, falls within industrial and commercial profits (BIC). This is so whether the letting is habitual or occasional.

The boundaries of furnished letting are set out first (A) before defining its tax regime, which distinguishes between the non-professional furnished lettor (B) and the professional one (C).

A. The boundaries of furnished letting

To be regarded as furnished for tax purposes, the property must contain sufficient furniture to give it a “minimum of habitability”. Tax law gives no further detail. To know in practical terms how to furnish the property, one can refer to the decree of 31 July 2015, which sets out a precise list of furniture that a property must contain to be regarded as furnished under civil law.

The following furniture and equipment are listed:

• Bedding including a duvet or blanket;
• Window blackout devices in rooms intended for use as bedrooms;
• Hob;
• Oven or microwave oven;
• Fridge and freezer or, at least, a fridge with a compartment able to reach a temperature of −6 °C or below;
• Crockery needed for taking meals;
• Kitchen utensils;
• Table and seating;
• Storage shelving;
• Light fittings;
• Household cleaning equipment suited to the property’s features.

In addition, tax case law establishes that the rent for a furnished letting must take account of the letting of the furniture.

However, if hotel-type or para-hotel services are added to the letting (breakfasts, provision of household linen, regular cleaning of the premises, reception of guests), the classification as furnished letting may be challenged for income-tax purposes.

If, in light of the above conditions, the letting can be classified as furnished letting, it may be exempt from income tax where it concerns part of the main home.

Also, if the letting is seasonal and the tenant does not make it their home, the letting takes on the nature of tourist accommodation. The investor must then file a declaration with the town hall where the property is located, using form Cerfa no. 14004*04.

In all cases, a rental investment that does not concern the investor’s main home is subject to the furnished-letting regime. It is then the investor’s income that determines the tax regime ultimately applicable, classifying them as professional or not.

B. Non-professional furnished letting (LMNP)

If annual rents do not exceed (i) €23,000 and/or (ii) the annual professional income of the investor and their tax household, the rents fall under the non-professional furnished-letting regime (LMNP).

Accordingly, if annual turnover does not exceed €77,700, the investor may fall under the micro-enterprise regime provided by article 50-0 of the CGI. The taxable result, made up of the rents received, is then reduced by a 50% allowance to account for the costs incurred. For furnished tourist accommodation, the threshold is €188,700 and the allowance is 71%.

If turnover exceeds the micro-BIC threshold, or if the investor elects for it, the actual-expenses (réel) regime applies. Article 39 of the CGI then allows the deduction of all costs related to the operation, in particular the depreciation of the let buildings and of works carried out on them. The deductible amount is nevertheless capped at the difference between the rents earned and all the other costs relating to the let property. It is advisable to use an accountant to keep proper accounts, which will allow an accounting result (and then a tax result) to be determined. Depreciation that could not be deducted in the year to which it relates may then be deducted from the results of later years. It thus becomes possible to offset the rental income entirely, or even to create a tax loss.

C. Professional furnished letting (LMP)

If gross annual rents exceed (i) €23,000 and (ii) the annual professional income of the investor and their tax household, the rents fall under the professional furnished-letting regime (LMP).

The rents received are then taxed in the industrial and commercial profits (BIC) category applicable to businesses. As with LMNP, beyond the annual turnover threshold of €77,700 (and €188,700 for furnished tourist accommodation), or by election, the investor is subject to the actual-expenses regime and may deduct all costs related to the activity (depreciation, loan interest, acquisition costs).

• Unlike LMNP, losses can be set off against the overall income of the investor and their tax household. Any excess loss can be carried forward for 6 years.
• However, the social-security treatment of rental income offsets the potential appeal of the LMP regime.

• Professional furnished lettors fall under the social-security scheme for self-employed non-agricultural workers. In practice, given the depreciation applied in determining the net letting result, the base for social-security contributions will be relatively low, or even nil. Nevertheless, an investor affiliated to the French social-security system will always owe minimum contributions (around €1,000).
• As for the income of non-professional furnished lettors, it is subject to social levies on investment income and similar, i.e. 17.2% in total (CSG at 9.2%, CRDS at 0.5% and the solidarity levy at 7.5%). Applied to low or nil income, the social cost of the letting is negligible.

A point of comparison: the unfurnished-letting regime

The furnished-letting regime appears more favourable than the property-income regime, and therefore than unfurnished letting, because:

• Under the micro-foncier regime, the deductible allowance is limited to 30% of receipts, against 50% or even 71% under micro-BIC.
• Under the actual-expenses regime, business taxation allows the depreciation of the let property to be deducted, a charge that can wipe out almost the entire tax result, unlike the actual-expenses property-income regime.

Investors now know how and why to turn to furnished letting. They may, however, hesitate to choose a corporate structure to carry on the activity.

II. The corporate structure for furnished letting

A rental investor may consider acquiring the property through a company, or, once acquired, contributing it to a company. Why? Letting furnished through a company provides a defined and protective legal framework and can make the transmission of wealth easier. However, choosing the right corporate structure matters, as it has significant consequences, in particular on the applicable tax regime. It turns out that the société civile immobilière (SCI) is less suited than the société à responsabilité limitée (SARL) or the société par actions simplifiée (SAS).

A. The société civile immobilière (SCI)

As its name indicates, the SCI is dedicated to managing individuals’ real estate. However, the tax classification of furnished-letting activity has consequences for the SCI that disadvantage the real-estate investor partner.

Indeed, for tax purposes, as we have seen, furnished letting is treated as a commercial activity. The resulting income is taxed in the industrial and commercial profits (BIC) category. As a result, the SCI will be subject to corporate income tax (IS), subject to a 10% tolerance threshold (where the pre-tax amount of the SCI’s commercial receipts does not exceed 10% of its total pre-tax receipts).

Yet the change of tax regime (from income tax, the SCI’s default regime, to corporate income tax) triggers all the consequences of a cessation of business, in particular the immediate taxation of profits not yet taxed and of latent capital gains. On a tax audit, the company and its partners will be retroactively taxed to corporate income tax and to the distribution tax due.

Corporate income tax is 15% of profits where they do not exceed €42,500, and 25% above. Depreciation recognised in the accounts will then reduce the amount of receipts, alongside the other deductible charges that may be taken into account.

However, if income is distributed to the partners, it will be subject to income tax and social levies as investment income. Dividends will thus be subject to the 30% flat tax (12.8% income tax and 17.2% social levies), unless an election is made for taxation at the progressive income-tax scale, after a 40% allowance. The partner cannot deduct the company’s losses when computing their income tax.

Unlike the SCI, commercial companies do not have their tax regime altered by the commercial classification of their activity. In this respect, the SARL and the SAS are more appealing for a furnished letting, which tax law treats as commercial.

B. The family SARL

The family SARL is a société à responsabilité limitée that benefits, by election, from a tax-transparency regime. In other words, the company’s result is taxed each year in the hands of the partners (and therefore to income tax) in proportion to their rights in the company. The regimes mentioned above (LMNP and LMP) therefore apply, except for the micro-BIC regimes.

Strict conditions must be met for the SARL to be so regarded under tax law:

• The SARL’s activity must be exclusively an industrial or commercial activity.
• The company must be formed exclusively between partners related by blood or marriage: relatives in the direct line (children, parents, grandparents, etc.), siblings, or spouses and partners in a PACS. Each partner must be directly connected to the others either by direct or collateral kinship up to the second degree, or by marriage, or by a PACS.

Thus, a family SARL is one formed between: spouses or PACS partners; a father and one or more children; a father, his children and their spouses or PACS partners; two brothers or sisters and their spouses or PACS partners; a grandfather and several grandchildren, provided they are siblings; a father-in-law and his son-in-law; two spouses or PACS partners and the child from a previous relationship of one of them.

By contrast, a SARL cannot qualify as a “family” SARL where it is formed between: two brothers and the son of one of them (except where this results from the death of one of the brothers); two spouses and their respective non-common children; two brothers-in-law (except where this results from the death of the sister); two cohabiting partners and their common children; a grandfather and grandchildren who are only cousins of one another.

If these conditions are not met, the return to corporate income tax brings back the consequences seen for the SCI. Here lies the constraint of the family SARL, which calls for caution regarding the entry and exit of partners.

C. The société par actions simplifiée (SAS)

This corporate form, known for its flexibility and adaptability, may be the simplest to set up. However, for tax purposes, the SAS is necessarily subject to corporate income tax, with no possibility of electing income tax where the SAS’s activity is a letting activity.

The double taxation highlighted for the SCI then applies again: at company level, to corporate income tax, then at partner level when they receive dividends subject to income tax as investment income.

Thus, only the SARL would preserve the advantages of furnished letting, where an election is made for the family-SARL regime. However, strict accounts must be kept, and the manager will be subject to minimum social-security contributions. The SARL’s partners must be confined to family members as strictly understood by tax law.

Accordingly, if no wealth-transmission objective is contemplated, direct letting appears the most appropriate route for the real-estate investor.