Have you invested or want to invest in rental real estate? You may have heard of the ” land deficit » ? If not, here is an update on the subject. What’s this all about? How do I generate it? We answer those questions.
What is the land deficit?
The property deficit is a tax system which allows a portion of his expenses related to his property income to be subtracted from his taxes. In other words, it is a question of deducting certain expenses when they are greater than gross property income. This common law mechanism may be associated with other laws of deficialisation. It is not taken into account in the total cap on tax loopholes (equal to 10,000 euros per year). It is a perfectly legal mechanism that allows for significant savings.
Several types of deductible expenses exist. On the one hand, there are non-financial expenses (in connection with the operation of the property) and on the other hand financial expenses, that is, those related to borrowing interest. Non-financial expenses include real estate agency fees, insurance premiums, property tax, construction, maintenance and repair costs, and condominium expenses. With respect to financial expenses, we have interest costs as well as borrowing interest for the acquisition/repair/improvement of the property.
Note that borrowing interest can only be deducted from property income, as the Tax Office differentiates between these and other types of expenses.
More concretely, if you rent your property and it has to undergo work, for example, calculate the amount of it. If it is higher than your gross property income, the difference is called the “property deficit” and you have the option to subtract this amount from your other income and up to the limit of 10,700 euros. Note that beyond this 10,700 euros, you can apply a deferral over a maximum of 10 years.
“Under the 3rd of Section 156 of the General Tax Code (CGI), property deficits related to urban or rural buildings resulting from non-borrowing interest expenses are deductible from overall income within certain limits and condition that the property concerned be leased until December 31 of the third year following the allocation of the income deficit. » In addition, according to Section 156 I 3 of the General Tax Code, after deducting a property deficit,a dwelling must continue to be rented for three years.
Land deficit: tax system and beneficiaries
If you want to take advantage of the tax benefit of the property deficit, you must opt for the actual plan. This is systematically applied if you exceed the 15,000 euros of rental income generated, but it is optional below this amount. The micro-dark scheme allows it a reduction of 30 of the charges. If your expenses are higher than 30 of your income, it is better to change your tax system and move to the actual plan.
On the side of those who can benefit from the land deficit, there are civil real estate companies such as ICS and other SCPIs and are not subject to corporation tax. There are also natural people who own property.
How do I calculate the property deficit?
The calculation of the land deficit is not complicated. First of all, you need to take the gross total of your property income and then subtract the financial expenses.
In the event of a negative result, you can take advantage of the tax advantage of the property deficit. With a positive result, proof that your financial expenses are less than your property income, make a new subtraction with non-financial expenses this time (income – financial expenses – non-financial expenses). With a positive result again, there is no land deficit. If the result is negative, the property deficit is attributable to the total income and the ceiling is, as explained above, 10,700 euros per year.
Benefits of the land deficit
As we said earlier, the property deficit is a tax advantage. Its main asset, therefore, is thatit allows homeowners to benefit from tax reductions. These can be combined with other reductions since the land deficit is not included in the capping of tax niches. Its other advantage is that it can be carried over several years (10).
In summary, the land deficit has three main advantages:
- It allows you to deduct up to 10,700 euros on the total income;
- It can be carried forward for the following years if it is more than 10,700 euros;
- It can be combined with other tax benefits.
Conditions to be met in order to benefit from the land deficit
Not everyone can take advantage of this tax benefit as certain conditions must be met. As a result, the land deficit only for residential buildings or transformed in this way. In addition, The property must be leased for a minimum of three years. “This obligation assumes that the tenancy is effective and permanent. This condition is not met when the space is vacant, even if the owner receives and reports income from the replacement of an insurance or other organization.” (General Tax Code). Finally, the real regime is mandatory. If you have opted for micro-dark, you must make a change of diet.