Since 1 July 2012, capital gains on property sold by individuals have been taxed at 34.5% (including social security contributions) on the difference between the purchase price and the sale price, although there are fortunately a number of adjustments and exemptions. Capital gains tax applies to the sale for valuable consideration of any property(house, flat, land, etc.) and any rights associated with it (shares in a company, for example). Free transfers such as gifts are not subject to this tax.
If you wish to sell a flat that is subject to high capital gains tax and then give the sale price to your children, it may be a good idea to give the flat to your children (outside the scope of capital gains tax), who will then sell it themselves.
In this way, you can "launder" the capital gains on the flat. The purchase price, equal to the value stipulated in the gift (or its market value if it has been under-estimated), will certainly be equivalent to the sale price, which will rule out any capital gains when the flat is resold.
We suggest that you consider the following cases of exemption from capital gains tax:
The property is your principal residence
No capital gains tax is payable when the property sold is the seller's principal residence at the time of sale. A property is considered to be a principal residence when it is the taxpayer's usual and effective residence.
The tax authorities allow exemption where the property was the taxpayer's principal residence until it was put up for sale.
However, the final sale must take place within a normal period of time. It is often said that this period should not exceed one year. In reality, in the absence of a precise text, the authorities may set a shorter or longer period depending on the facts. The seller must take all necessary steps to put the property up for sale since it is no longer occupied. This can be proved by signing a sales agreement with an estate agent, but here again it is a question of fact: if the price is clearly exaggerated and stands in the way of the sale, the authorities may draw the necessary conclusions and disregard the exemption.
It is also important not to let the property between the time it is released and the time it is finally sold. For example, if you rent out your flat for just one or two months, the exemption will no longer apply, even if the flat was your main residence before you rented it out.
The exemption may also apply to the immediate and necessary outbuildings of the main residence, provided that they are sold at the same time as the property.
In addition, the exemption may be claimed by a partner in a property investment company (SCI) who occupies the property owned by the company as his or her principal residence.
The sale price is less than or equal to €15,000
Capital gains tax does not apply to property sales of €15,000 or less. The threshold is assessed in relation to the full ownership value of the property or only part of the property.
Where the property sold is jointly owned, the €15,000 threshold is assessed on the basis of the shares. For example, 90% of a flat is owned by Mr X. and the remaining 10% by Mrs Y.. The flat is sold for €150,000. In this case, only Mrs Y can benefit from this exemption, as the sale price corresponding to her share in the joint ownership is equal to €15,000 (€150,000 x 10%).
In the case of the sale of a property in which the right of ownership is split, the €15,000 threshold is assessed in relation to each undivided share of full ownership.
To illustrate this case: the usufruct of a flat is held entirely by Antoine. Yannick and Noëlle own 70% and 30% respectively of the bare ownership. The flat is sold for €42,000. The tax threshold is assessed as follows:
- €42,000 for Antoine, which corresponds to the full ownership value of the property sold;
- 29,400 (€42,000 x 70%) for Yannick, which corresponds to the value of his undivided full ownership share;
- 12,600 (€42,000 x 30%) for Noëlle, corresponding to the value of her undivided full ownership share.
As a result, Antoine and Yannick will be liable for capital gains tax (and social security contributions) if the amount used to determine the tax threshold exceeds €15,000, while Noëlle will be exempt.
The property sold has been held for more than 22 years (income tax) and 30 years (social security contributions).
To calculate the net taxable capital gain, an allowance must be applied to the gross capital gain, which can result in exemption when it reaches 100%.
Since 1 September 2013, there have been two coexisting allowance scales for calculating tax on property capital gains.
For income tax, the annual allowance is 6% from the 6th to the 21st year of ownership and 4% for the 22nd year. This deduction scale means that the capital gain is exempt after 22 years of ownership.
However, the exemption is not total, as social security contributions (CSG and CRDS) are subject to a different schedule, i.e. an annual allowance of 1.65% per annum from the 6th to the 21st year of ownership, then 1.60% for the 22nd year of ownership and finally 9% from the 23rd to the 30th year of ownership. As far as social security contributions are concerned, the capital gains on the property are therefore exempt after 30 years.
Income tax is 19% and social security contributions are 15.5%.
A flat acquired on 1 June 2000 will be exempt from the said tax if it is resold after 1 June 2030. The allowance takes account of past years: if the flat were sold in its thirtieth year, for example on 23 February 2030, the allowance would be 100% for income tax and 91% for social security contributions.
Barring exceptions, the starting point for the period is the date of the deed recording the transfer of the property.
In the case of the transfer of a property that is part of an undivided joint estate, the starting date is the date on which the property enters the joint estate. However, this is only possible if the seller has been a joint owner since the joint ownership began.
The first sale of a second home
From 1 February 2012, sellers can apply for exemption from capital gains tax when they sell a property that they do not use as their main residence. This exemption applies under certain conditions:
- the property sold must not be the vendor's main residence and must be used for residential purposes
- the vendor must never have benefited from this exemption before
- The vendor must not have owned their principal residence for at least four years prior to the sale (either directly or through a company).
- The vendor must re-invest the sale price of the property in the acquisition or construction of the principal residence within 24 months.
Re-investment of the purchase price is a condition for qualifying for the exemption. If the entire price is re-invested, the seller will be fully exempt. If only a fraction of the price is re-invested, the seller will be exempt for that fraction.
This exemption is optional and must be requested by the vendor. It can only be applied once.
If the vendor has put a property up for sale and acquires his or her principal residence before actually selling the property, he or she may still benefit from the exemption, provided that the (secondary) property was put up for sale before the acquisition of the principal residence; that the property is sold within a normal period following the sale; and that the price is re-invested in the acquisition of a principal residence.
Other cases of exemption from capital gains tax
There are a few other cases where capital gains tax can be waived:
* the property was the principal residence of a retired or disabled person in a residential institution
* the property is owned by a person receiving an old-age pension or a disability card;
* the property has been expropriated;
* the property was the seller's principal residence and has not been occupied since, if the seller is now a resident of an establishment mentioned in 6° or 7° of article L.312-1 of the Code de l'Action Sociale et des Familles if, in respect of the penultimate year preceding that of the transfer, he or she is not liable for wealth tax and does not have a reference tax income exceeding the limit set out in II of article 1417 of the CGI and if the transfer takes place within less than two years of entering the establishment.
* the property has been exchanged as part of a land consolidation or similar operation;
* on the sale of a right to raise a building by 31 December 2014 at the latest, provided that the transferee undertakes to build and complete residential premises within four years of the date of acquisition.