In order to reduce the public deficit, the Finance Bill proposed by the government for 2013 includes a considerable austerity plan. This will result in a number of tax increases. Real estate transactions, and more specifically the taxation of capital gains on property, have not been spared by this plan.
With the exception of the introduction of an additional but temporary allowance, the government is proposing to increase capital gains tax on the sale of building land by abolishing the allowance for length of ownership.
A temporary 20% allowance for 2013
To boost the property market next year, the government is proposing to introduce a new allowance applicable only in 2013. This exceptional allowance would amount to 20% and would apply to sales of property other than building land (house, flat, land that cannot be built on, etc.).
This 20% allowance would apply to the net capital gain after taking into account the allowance for years of ownership.
However, this allowance would apply only to income tax and not to social security contributions. As a result, of the 34.5% tax charge, only the 19% income tax charge would be affected by this allowance. The 15.5% social security contributions would not benefit.
According to the government, the aim is to "create a short-term "supply shock" and then to create a more fluid property market over the long term".
A considerable increase in capital gains tax on the sale of building land
- abolition of the allowance for length of ownership
The government is proposing to abolish outright the allowance for length of ownership for sales of building land. This allowance currently allows the seller to be totally exempt from capital gains tax when he or she has held the property for more than 30 years.
The government has adopted the same definition of building land as that used for property VAT, i.e. land on which construction may be authorised under a local town planning scheme, another town planning document in its place, a local map or article L. 111-1-2 of the town planning code.
So, regardless of the desire to build, a plot of land is considered to be suitable for building when it is possible to build on it in accordance with the planning documents;
The abolition of the allowance for length of ownership should only apply to sales taking place on or after 1 January 2013.
However, the government is planning a transitional arrangement: the allowance for length of ownership could still apply if the promise to sell has acquired a date certain before 1 January 2013 (for example, a registered preliminary sales agreement), and if the deed of sale is signed before 1 January 2014.
According to the government, the aim of abolishing the allowance for length of ownership is to "combat the retention of land resources by owners". Owners of building land will no longer have an incentive to wait years before selling.
However, higher taxation will not encourage them to sell, especially if this tax is combined with a tax on the sale of land that has become suitable for building. The constant changes to the taxation of capital gains on property in recent years will undoubtedly mean that property owners will have to wait for a new change of government, which may go back on the abolition of this allowance.
- Taxation of capital gains on the progressive income tax scale
The bill proposes that capital gains realised from 1 January 2015 on the sale of building land should be subject to the progressive scale of income tax, "in the interests of tax fairness".
The current 19% withholding tax at the notary's office will be maintained, but will simply be an advance payment on the income tax actually due. If taxpayers overpay, they would be entitled to a refund.
In addition, people who realise a capital gain on the sale of building land that they have held for more than four years at the date of sale will be able to apply to benefit from the quotient system for exceptional income (article 163-0 A of the French General Tax Code), which prevents them from falling into a higher tax bracket because of exceptional income.
This system is available even if the capital gain does not exceed the average net taxable income for the last three years (a condition normally required for other income).