This article looks at the main costs arising from a property sale. These costs may arise from taxation or from an agreement. In order to identify these additional costs (which are not always provided for by the parties), we will first look at the costs borne by the vendor and then those borne by the purchaser.
1. The costs of a property sale borne by the seller
The seller of a property, notwithstanding the fact that he receives the sale price, must sometimes bear certain costs. The sums he may owe are justified either by law or by agreement.
We will first look at the sums owed by the seller of a property and imposed by law. This corresponds to the seller's tax liability, which mainly concerns three taxes: capital gains tax, VAT and the flat-rate tax on land that has become suitable for building.
Secondly, we will look at the costs incurred by the seller following an agreement. These may include the costs of transferring the property to the property manager, the costs of releasing the property or an early repayment indemnity.
Taxation of the vendor in a property sale
Capital gains tax
The tax most frequently encountered by sellers following the sale of their property is capital gains tax. This tax can be very high, depending on the circumstances, and can make sellers feel unfair, so they will do everything they can to avoid it. Unfortunately, there is no way of avoiding capital gains tax, and we strongly advise against any use of bribes.
The problems associated with high capital gains tax should be considered before the property is sold, i.e. when it is acquired through a transfer for valuable consideration or free of charge.
For example, when a property is transferred by gift or inheritance, the donee or heir will tend to undervalue the property to minimise transfer tax. When the property is resold at a real market price, the seller will find himself with a significant capital gain due to the undervaluation at the time of acquisition.
The same may apply if the purchase was made with a bribe: the capital gain will be calculated on the basis of the values stated in the deed of purchase.
The capital gains tax rate is 34.5% (including social security contributions) and applies to the difference between the sale price and the purchase price.
Capital gains tax is only payable in the event of a transfer for valuable consideration (= property sale, exchange, etc.) and not in the event of a transfer free of charge (donation or inheritance).
When the property has been acquired as a result of a gift or inheritance, the purchase price used is that declared in the deed.
There are a number of adjustments for calculating capital gains. For example, the acquisition price may be increased by the acquisition costs (in the case of an acquisition following a transfer for valuable consideration, it will be possible to opt for a flat rate of 7.5%). In addition, the purchase price may be increased by the cost of works. These may be deducted either at their actual cost or at a flat rate (15% of the purchase price) if the property was purchased more than 5 years ago. Please note that if you wish to deduct the actual value of the works, not all of them can be taken into account. Only building, reconstruction, extension, renovation or improvement costs incurred by the vendor and carried out by a company since the completion of the property or its acquisition if this is later, can be added to the purchase price if they have not already been taken into account for income tax purposes and are not rental costs.
In addition to the adjustments made to the purchase and sale prices, capital gains on property are subject to certain allowances, depending in particular on the length of time the property has been held.
There are a number of cases in which capital gains tax can be waived. The main exemptions relate to the sale of a principal residence or the sale of a property after being held for more than 30 years.
In the latter case, the capital gains tax is deducted progressively:
2% for each year after the fifth year of ownership;
4% for each year after the seventeenth;
8% for each year after the twenty-fourth;
Capital gains tax is calculated and paid by the notary on the sale price once the deed of sale has been signed.
Value added tax
As with capital gains tax, the more value added tax the vendor has to pay, the more profitable the resale.
To determine whether the sale falls within the scope of VAT, you first need to know whether the seller is a taxable person for VAT purposes (e.g. developer, property trader, etc.) or not, regardless of whether the buyer is a taxable person or not.
The seller is a VAT taxable person
In this case, the seller of the property is legally liable for VAT.
a- VAT will apply automatically or by option, depending on the nature of the property sold
If the property sold is building land or a building that has been completed for less than five years, value-added tax is compulsorily applicable.
It should be noted that a plot of land is considered to be building land if it is located in an area designated as suitable for building according to town planning documents, regardless of whether or not the purchaser intends to build.
On the other hand, VAT only applies by option if the taxable vendor so decides, when the built property has been completed for more than five years or the land is not building land.
b- With regard to the VAT base, it is necessary to know whether the seller has exercised any right to deduct VAT on the acquisition of the property sold.
The total price is the basis of assessment for value added tax when the acquisition has given rise to a right to deduct. This is the case when the purchase price of the property now being resold was stated inclusive of VAT.
The same applies when the seller opts for VAT even though the land is not building land.
On the other hand, value added tax is charged on the gross margin when the acquisition did not give rise to a right to deduct.
The seller is not liable for VAT
When the seller is a private individual not liable for VAT, only the resale of a built property completed less than five years ago and acquired in a future state of completion (purchased off-plan) falls within the scope of value added tax. In this case, the sale price includes VAT.
New properties built by non-taxable vendors are excluded from the scope of VAT.
The notary will calculate the VAT to be paid, which will be deducted from the sale price.
Flat-rate tax on land that has become building land
This optional local tax, introduced by the ENL Act of 6 July 2006, is set out in article 1529 of the General Tax Code. In the event of the sale of a building plot, it is advisable to contact the Commune beforehand to find out whether this tax has been introduced.
The law applies to land that has become building land as a result of being classified by a local urban development plan or a planning document in lieu thereof as an urban area or a development area open to urban development, or by a local map as a building land area.
The flat-rate tax on land that has become constructible is payable by the vendor only for the first sale for valuable consideration since the land became constructible. It must be paid to the tax authorities when the land is sold.
The flat-rate tax on land that has become building land does not apply in certain cases:
- immediate and necessary outbuildings of the main residence; the land forming the outbuilding must be sold at the same time as the main residence;
- a declaration of public interest ;
- exchange as part of certain land consolidation operations;
- sale price less than or equal to €15,000;
- sales before 31 December 2011 to certain legal entities;
- land that has been classified as building land for more than 18 years;
- the sale price is less than the purchase price plus 200%;
It should be noted that the municipal council resolution introducing the tax cannot be applied to sales taking place within three months of the said resolution.
The tax is based on an amount equal to the land sale price (possibly corrected as described below) less the purchase price stipulated in the deeds, updated in line with the latest consumer price index excluding tobacco published by the French National Institute for Statistics and Economic Studies. If there is no reference, the tax is based on two-thirds of the sale price, defined in the same way as in the first case.
A tax of 10% is applied to this base.
This tax may be combined with capital gains tax on real estate, as well as the tax introduced by the law of 27 July 2010 on the modernisation of agriculture and fisheries (tax on the sale of land that has become building land and whose sale price is 10 times higher than the purchase price).
Costs borne by the seller of a property under an agreement
Trustee transfer fees
These costs apply to co-owned properties. These are fees retained by the property management company for the change of owner (equivalent to administration fees). The price varies from one syndic to another. In general, you should expect to pay between €200 and €500. These fees are rare if the property is managed on a voluntary basis.
When selling a property in co-ownership, the notary always contacts the syndic to find out whether the seller is up to date with his co-ownership charges. If this is the case, the notary must pay the seller the purchase price, without the syndic being able to appeal against the purchase price on the grounds of a disagreement over the amount of the syndic's transfer fees.
These transfer costs used to be borne by the purchaser. However, case law has since ruled that this practice is illegal, as the purchaser cannot be held liable for a sum justified by an agreement to which he or she was not a party.
The seller alone must therefore bear this cost, which was agreed between the property manager and the seller.
Release costs
If the property sold is subject to a mortgage or a lender's lien, the notary must discharge the mortgage. He will approach the lender between the preliminary sale agreement and the final sale to obtain a statement of early repayment. Once the final sale has been completed, the notary withholds from the sale price the sum used to pay off the lender, so that the lender can authorise the notary to remove the mortgage or PPD (= privilège de prêteur de deniers) on the property. In this way, the buyer is guaranteed to buy a property that is free of any encumbrances, with no risk of the seller's creditors seizing the new property.
The cost of a discharge is calculated on the basis of the capital borrowed and ancillary costs. In general, the cost is around €600.
Early repayment indemnity
Borrowers can always repay all or part of their home loan early. However, the loan contract may prohibit repayments equal to or less than 10% of the initial amount of the loan, unless the balance is involved.
If the loan contract includes a clause stating that, in the event of early repayment, the lender is entitled to demand compensation for interest not yet due, this may not exceed an amount which, depending on the remaining term of the contract, is set according to a scale determined by decree.
No compensation is payable by the borrower in the event of early repayment when the repayment is motivated by the sale of the property following a change in the place of professional activity of the borrower or his/her spouse, by their death or by the forced cessation of their professional activity.
2. The costs of a property sale borne by the purchaser
Taxation of the purchaser in a property sale
Transfer costs
The purchaser is responsible for all transaction costs. These include registration fees, the notary's fees and the registrar's salary. Transfer fees, which amount to around 7-8%, are commonly referred to as "notaire's fees". It should be noted that the notary collects around 1% (incl. VAT) of the transaction price, with the remainder being collected mainly on behalf of the State, the Département and the Commune.
To reduce the buyer's tax bill, it is important to include a list of the furnishings in the preliminary sale agreement, with an item-by-item valuation. Registration duties of 5.09% are levied on the price of the property and not on the furniture, which means that you save 5.09% on the cost of the furniture.
Furnishings must be valued at their current market value. Although there are no rules governing the valuation of furniture, it should not exceed 5% of the value of the property.
What are wrongly referred to as reduced notary fees are reduced registration fees, which fall from 5.09% to 0.715%. Overall transfer costs are therefore around 2.5% instead of 7-8%.
When the seller is a private individual not liable for VAT, there are "reduced notary fees" for the purchaser if the property is sold within 5 years of completion and (cumulatively) if it has been purchased in a future state of completion.
This mainly concerns flats purchased off-plan and resold within 5 years. A vendor who has bought a flat off-plan and resells it within 5 years will have to pay the VAT on the sale price (19.6%) less the VAT he or she paid at the time of purchase (on the flat and the solicitor's fees). The sale price will therefore include VAT, and the purchaser will pay reduced registration fees (0.715%).
A private vendor (not liable for VAT) who buys a plot of land, has it built and then sells it on within 5 years will not be liable for VAT (as the purchase is not in a future state of completion) and the purchaser will pay ordinary transfer fees (7-8%).
Professional purchasers may benefit from reduced fees or an exemption. If the purchaser is liable for VAT and undertakes to build or resell, he or she will be liable for a fixed fee of €125 in the first case, or reduced transfer duties (0.715%) in the second.
Purchasers liable for VAT must undertake to build or resell the property within 4 years.
Development tax
If you buy a building plot, you will have to pay development tax. This new tax replaces the taxe locale d'équipement (TLE), the taxe départementale pour le financement des conseils d'architecture, d'urbanisme et de l'environnement (TDCAUE), the taxe départementale des espaces naturels et sensibles (TDENS), the taxe complémentaire à la TLE in the Ile-de-France region, the taxe spéciale d'équipement in the Savoie département and the programme d'aménagement d'ensemble (PAE).
It should be noted here that development tax applies to construction, but also to the reconstruction and extension of buildings and, more generally, to all developments of any kind for which planning permission is required.
Costs borne by the purchaser of a property under an agreement
Guarantees required by the lender
To finance the purchase of a property, buyers will often turn to a bank. To guarantee the loan, the bank may ask for a guarantor (a natural or legal person guaranteeing repayment of the loan) or a real guarantee such as a lender's lien or mortgage.
Costs will depend on the amount of the loan and its term. The buyer will need to compare which solution is cheaper, a bank guarantee or a real guarantee. For a long-term property purchase, where you expect to be able to repay the loan in full before the property is resold, a privilège de prêteur de deniers may be more attractive than a guarantee, as there will be no release fees to pay when the property is resold.