When a property is sold by an individual, the capital gain realised on the property since it became part of the seller's assets is taxed in accordance with articles 150U et seq. of the General Tax Code.
In principle, this tax is payable when the deed of sale is signed. However, when certain conditions are met, the seller may be exempt from capital gains tax; this applies, for example, to the sale of a principal residence or a property that the seller has owned for more than 30 years. These exemptions were discussed in an article entitled: Exemption from capital gains tax on property.
Here we look at how capital gains tax is calculated, so that all sellers can find out how much they will have to pay.
There are three stages in calculating capital gains tax:
- first, the realised capital gain, known as the gross capital gain, must be determined
- then an allowance is applied, based on the length of time the property has been held, to calculate the net capital gain
- finally, a tax rate is applied to this net capital gain.
Calculating capital gains tax: Calculating gross capital gains
Capital gains are calculated as the difference between the sale price (the price at which the property is sold) and the purchase price. However, certain adjustments must be made to the sale price and acquisition price.
Determining the sale price :
The transfer price corresponds to the sale price of the property as stated in the deed of sale. However, if the tax authorities consider that the property has been grossly undervalued, they may increase the price declared in the deed. This is the case, for example, if the seller and buyer have agreed to a bribe. This increase will, of course, be subject to civil, tax and criminal penalties.
Where the sale includes items of furniture, their value may be deducted from the sale price and not taken into account when calculating the capital gain, provided that their existence and value are justified, for example by means of invoices or an inventory drawn up by an auctioneer.
In addition, provided that supporting documents are available, the sale price may be reduced by certain costs incurred by the seller at the time of the sale. These costs will be deducted from the taxable capital gain by reducing the sale price.
Only certain costs listed in article 41 duovicies H of appendix 3 of the General Tax Code are deductible.
These include
- Fees paid to an intermediary or agent; for example, estate agency commissions.
- Costs relating to certifications and diagnoses made compulsory by the legislation in force on the day of the sale. These are all the diagnostics that the seller must carry out as part of his obligation to provide information, such as asbestos and lead diagnostics, etc.
- Eviction compensation paid to the tenant by the owner who sells the rented property free of occupation;
- Fees paid to an architect for work required to obtain planning permission;
- costs incurred by the vendor of a building to obtain the release of a mortgage on the building from a creditor.
This list is exhaustive, and no other costs incurred by the seller may be deducted from the sale price.
Determining the purchase price
The purchase price is determined by taking the value of the property as stated in the seller's title deed (deed of sale, gift, declaration of inheritance, etc.) plus the purchase costs and certain work expenses.
Acquisition costs
The seller has the option of increasing the value of the property when it enters his estate by the acquisition costs he has paid. These costs include the notary's fees, any commission paid to an estate agent, tax representation costs, and registration fees paid to the tax authorities (transfer duties for valuable consideration or free of charge).
If the seller becomes the owner of the property as a result of a transaction for valuable consideration (sale, exchange, etc.), the seller may choose to increase the purchase price by the actual amount of the costs or to apply a flat rate equal to 7.5% of the sale price.
When the seller becomes the owner as a result of a gratuitous act (gift, inheritance), only the actual costs can be taken into account.
Expenditure on works:
It is possible to increase the purchase price by the cost of works, and more specifically by the cost of building, rebuilding, extending or improving the property (i.e. adding new equipment or a feature that is more suited to modern living conditions). Expenditure on maintenance and repairs cannot be taken into account, regardless of the amount.
The work must have been carried out by a company and not by the vendor himself. The seller will have to justify the amount of the work by means of invoices issued by the companies.
However, where the property has been owned by the vendor for more than five years, the tax authorities allow the cost of the work to be assessed at a flat rate of 15% of the purchase price, without any supporting documentation, regardless of whether or not the work was actually carried out. This means that even if the seller has not carried out any works, as long as he has owned the property for more than 5 years, he will be able to increase the purchase price by 15% when calculating the capital gain.
Determining the gross capital gain
Once the adjustments have been applied, the difference between the sale price and the purchase price needs to be calculated to determine the gross capital gain. This gross capital gain may then be subject to a deduction depending on the length of time the property has been held.
How capital gains tax is calculated: allowances for length of ownership: calculating the net capital gain.
Article 150-VC of the General Tax Code provides for a deduction for the length of time the property has been held, applied to the gross capital gain and set at :
- 2% for each year after the fifth year of ownership,
- 4% for each year after the seventeenth year,
- 8% for each year after the twenty-fourth year.
This means that after 30 years, the seller is completely exempt from capital gains tax (prior to the reform introduced by the second Supplementary Finance Act for 2011, the exemption applied after 15 years of ownership).
Once this allowance has been applied, the net capital gain emerges, to which the tax rate must be applied.
Taxation of capital gains on property
The rate of capital gains tax for individuals has been 34.5% since 1 July 2012.
Example of how capital gains tax is calculated
To give you a better understanding of how capital gains tax is calculated, here is an example:
Mr X sells a house in ANNECY on 25 March 2012 for €650,000. Mr X had acquired this house on 06 May 1987 for a price of 2,623,828 francs, i.e. €400,000.
For this sale, Mr X had to carry out asbestos, lead and electricity diagnostics, as well as a DPE. These inspections cost €450.
- Calculation of capital gains tax:
Gross capital gain :
The sale price is €650,000, minus the cost of the diagnostics (€450), i.e. €649,550.
The acquisition price is €400,000, to which must be added the acquisition costs and the cost of the works.
Acquisition costs: Mr X is the owner following a sale, i.e. a deed for valuable consideration. He can therefore opt for the flat rate of 7.5%.
We therefore assume that the acquisition costs amounted to 7.5% of €400,000: €30,000.
If the actual costs he paid at the time of purchase were higher, he could deduct them. This would be the case, for example, if he had paid an agency commission at the time of his purchase.
Works: Mr X has never carried out any major works. However, as he has owned the house for more than 5 years, he can add a lump sum of 15% to the purchase price:
15% of €400,000: €60,000.
The purchase price will therefore be equal to the sale price + the purchase costs + the cost of the works = €400,000 + €30,000 + €60,000 = €490,000.
The gross capital gain realised by Mr X on his house in Annecy is therefore equal to 649,550 - 490,000 = €159,550.
Calculation of the net capital gain :
The tax authorities allow an allowance to be applied to the gross capital gain based on the length of time the property has been held, set at
- 2% for each year after the fifth year,
- 4% for each year after the seventeenth year,
- 8% for each year after the twenty-fourth year.
Mr X has owned his house in Annecy since 06 May 1987, i.e. for 24 years.
He is entitled to a 2% allowance for each year of ownership beyond the fifth year, up to the 17th year, i.e. 12 years.
The allowance is therefore equal to 24%.
24% of 159550: €38292
He then benefits from a 4% allowance for each year after the seventeenth year, up to the 24th year, i.e. 7 years.
The allowance is therefore 28%.
28% of 159550: €44674
Mr X's net capital gain is therefore equal to 159550 (gross capital gain) - 38292 - 44674 = €76584.
Taxation of capital gains
As the tax rate is 34.5%, Mr X will have to pay :
76584 x 34,5% = 26421,4 €