Doubling of the land deficit for landlord owners since 2023

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In favor of the fight against climate change, the Climate Law reviews fiscal policies in France. A doubling of the land deficit is the incentive measure calling for the upgrading of homes qualified as energy sieves. Of course, any lessor benefiting from the increase in the land deficit expects to drastically reduce their taxes. Although at first glance, it is a fiscal carrot, some elements call into question the effectiveness of the system.

What are the main changes to be observed in the context of a doubling of the land deficit? With the magnitude of the costs of managing rental properties in the Paris region, will the lessor derive real benefits? Highlighting the ins and outs of this new fiscal boost.

The basis of the land deficit

For a better understanding of the changes currently taking place, an introduction to the concept of land deficit is in order.

Instituted by the Balladur law in 1993, the land deficit contributed to the relief of taxes for the owner. Theoretically, the land deficit occurs when the share of expenses is greater than the property income. In other words, a deficit is observed when rental housing is more expensive compared to its profitability. The amount of this “deficit” is then attributable to total income. The latter includes property income including rent, as well as salaries, social benefits and pension.

The taxpayer is thus reduced his tax up to a limit of €10700. If the ceiling is exceeded, the excess land deficit may be carried forward:

• • over 6 years when deducted from total income
  • over 10 years when deducted from property income.

Note that this tax tip only concerns landlords subject to the real taxation regime.

The doubling of the land deficit

Having made these clarifications, the current doubling of the land deficit follows the same principle. Concretely, the value of the deficit ceiling amount is revised to €21400 (€10700 x 2). Hence the notion of a doubling of the land deficit. Beyond a fiscal maneuver aimed at reducing the cost of taxation, the doubled land deficit admits ecological and economic challenges. It is important to understand the origin of this new measure as well as the objectives of its implementation.

Why is the land deficit doubling?

The amendments voted by the government call for the doubling of the land deficit. Indeed, fiscal revision is part of the fight against climate change. In France, colander housing is at the center of concerns. In Paris, there are more than 330,000 thermal strainers, including a concentration of 22.3% and 21.8% respectively in Saint-Denis and Argenteuil. This is why Paris is at the top of the list of priority regions for doubling the land deficit. In this perspective, the doubling of the land deficit contributes to the upgrading of energy-intensive homes.

The second amended finance bill recognized and implemented the doubling of the land deficit on 1 January 2023. As mentioned above, this doubling reduces the land deficit ceiling to an amount of €2,1400. Thus, by allowing the carrying out of energy renovation work, owners will be able to claim this tax relief.

The doubling of the land deficit concerns in particular homes classified G and F. In the interval between 2023-2025, landlords will have time to review the energy performance of their rental properties. If necessary, habitats that remain energy-intensive will no longer be able to be rented in a few years. For the time being, the government has only ordered a ban on the revision of rent amounts.

Seen from another perspective, reducing the tax burden will offset the cost of new installations. In fact, bringing homes up to standard involves enormous work costs. This is why a doubling of the land deficit is a fiscal maneuver that favors tax reduction.

The conditions for granting this tax review

The doubled land deficit applies for energy renovations for which the taxpayer justifies the acceptance of estimates. The reception of applications began on November 5, 2022, but it will continue in the course of 2023. However, renovation projects must be carried out between the period of January 1, 2023 and December 31, 2025. Property income is declared using form No. 2044. Proof of expenses must be provided at the request of the tax authorities.

Eligibility of work

As stipulated in the second amended finance law, this device concerns only energy renovation. In other words, any reconstruction or expansion work is excluded. In this case, the related expenses will not be deductible from your overall income. However, these types of expenses are eligible for the Perissol, Besson or Robien schemes. However, in case of doubt, the lessor can always request a tax review if the property deficit was wrongly deducted.

Housing qualified as energy sieves

In addition, the owner must also carry out an energy balance in order to obtain a DPE classification. The energy performance diagnosis divides homes into 7 classes ranging from A to E. Class A corresponds to the best rated homes while the letter E indicates poor energy performance. Also, a landlord cannot claim a doubling of the land deficit in the presence of a class A, B or C housing in the presence of a class A, B or C housing. As a matter of urgency, only homes classified F or G are eligible for the system.

A device associated with the real regime

Moreover, the doubling of the land deficit is associated with the real taxation regime. On the other hand, it does not systematically apply to income subject to the micro-land regime. In the latter case, the property income is less than €15,000 per year. Nevertheless, the taxpayer has the right to switch to the real regime in order to benefit from the doubling of the land deficit. It is an irrevocable decision over three consecutive years.

The advantages set out in this tax scheme

Calculating the doubling of the land deficit can lead to conclusions about the effectiveness of the system. However, before moving on to this numerical assessment, it is worth listing the tangible benefits of this fiscal mechanism.

A double tax reduction

The investor will benefit from a double tax break to reduce his taxes. The entire cost of the renovation work will be deducted from the total income. You will benefit from a reduction in income tax according to the marginal tax bracket, not to mention social security contributions (17.2%). With a taxable income of around €50,000, a taxpayer is in the marginal tax bracket of 30%. In this case, he will be able to benefit from a tax reduction of 47.2% spread over a period of 6 to 10 years. Also note that the tax exemption for the land deficit takes effect as soon as you start the work.

Promote existing goods on the market

Apart from fiscal optimization, the beneficiaries of this mechanism can also invest in properties located in the city center. Indeed, this is not a question of supporting an investment. You will therefore not have to take out a loan or find available land on the outskirts. This land system simply allows you to invest in existing properties, especially in mainland France. In concrete terms, beyond being a tax advantage, it is above all a wealth transaction.

The flexibility of the device

In return for the advantages granted to the lessor, almost all the systems require the latter to observe a rent ceiling. This has the effect of limiting his land income. However, this is not happening with the doubling of the land deficit. By applying for this device, you will not have to respect an income ceiling once the energy renovation work is completed. In the Paris region, you can promote the energy performance of housing by reviewing the initial rent before renovation.

Quantified assessment of the doubling of the land deficit

A numerical simulation of this new mechanism makes it possible to deduce whether the beneficiary will be able to really benefit from the tax reduction. All energy renovation works cost on average between €10,000 and €30,000. It would therefore be interesting to see if the tax deduction could significantly reduce the lessor's expenses.

As an illustration, a lessor taxed at 30% notes a land deficit of €28,500. In the event of a doubling of the land deficit, the €2,1400 can be withdrawn immediately from his salary. It will then be a “deficit used”. By applying the tax rate for the income bracket, the tax will be reduced by €6,450.

That is, 21500€ x 30% = 6450€.

Subtracting the deficit used, there is still a surplus deficit of €7,100

That is, 28500€ - 21400€ = 7100€.

This deficit will be provisioned and will not be deductible from the salary. It will be applied when the lessor has a positive income. At that time, the lessor will benefit from a tax deduction on the tax bracket and social security contributions. In other words, with a provisioned deficit of €7,100, the tax deduction will be:

(7100€ x 30%) + (7100€ x 17.2%)

(2130€) + (1221.2€)

That is €3351.2.

However, the legislation omitted the differences in calculation between the “deficit used” and the “deficit provisioned”. Taxpayers must therefore reconsider their calculations to assess whether this system will be profitable for them.

The first deficit bracket (i.e. €2,1400) is deducted from your salary and will then benefit from a tax reduction equal to your income bracket. The percentage of reduction will depend on the amount of your wage income (0%, 11%, 30%, 41% or 45%)

In the example given, the lessor's income bracket corresponds to a tax rate of 30%. The same will apply to the calculation of the tax reduction on the basis of the provisioned deficit (remaining deficit). However, the calculation differs slightly since it also includes social security contributions of 17.2%.

As a reminder: (€7100 x 30%) + (€7100 x 17.2%) = €3351.2.

Concretely, the doubling of the land deficit will make it possible to benefit from a tax break of €9801.2.

That is 6450€ + 3351.2€ = 9801.2€.

Unfortunately, the tax deduction of €3351.2 is only effective after 6 years. There is therefore a time issue that is at stake in this fiscal optimization. In addition, depending on your income group, the tax deduction on the funded deficit may be more or less significant. We must not forget that it includes social security contributions of 17.2%.

All things considered, you can only rely on the first bracket of the deficit to reduce your taxes. However, the amount obtained must be large enough for it to be significant in terms of your investments. However, this example is proposed by way of illustration in order to have an overview of the operability of this device.

What about taxpayers with a tax bracket less than or equal to 11%? The situation can sometimes turn into a disaster. Knowing that their income is very low compared to their expenses, they can benefit from the discount. This tax gift aims to reduce the taxation of taxpayers with modest incomes.

However, if the discount applies to the first year, the tax will be adjusted at the rate paid at source for the previous year. In the end, this revision may cancel out all the gains. You may as well lose your benefits on the tax bracket as well as on social security contributions.

What can we conclude from this tax measure?

Against all odds, the doubling of the land deficit remains above all an incentive. Its application aims to ensure that homes classified G and F can gain in energy performance by 2025. However, the method of calculation set out above calls into question the effectiveness of the system, at least for certain tax brackets.

The example developed in this study cannot be representative of all the cases in which tax is calculated. However, the lessor can estimate the cost of his work knowing that he will have to avoid it with or without tax optimization. By knowing his tax bracket, he can also use the example calculation to assess the extent of his tax advantages. A simple reconciliation between the amount of the tax deduction and the cost of the work will better inform him in his decisions.