Second Home Tax Solutions

Your client is married; he has two daughters of legal age (over 18). He wishes to purchase a new property (less than five years old), under VAT regulation, for an approximate value of € 3,000,000.
This house should be able to deliver a rental income of about €180,000 per year.

Several alternatives are available for your client to buy this property.

1 / Offshore company

The establishment of an offshore company is accompanied by a high tax, that being 3% of the value of the property (which is on average € 90,000) to be paid annually.

Furthermore, its establishment costs are € 40,000, its management costs are € 20,000 annually, and it costs another € 40 000 to close it. Moreover, the French tax authorities often closely surveys offshore companies.

Another problem is that a potential buyer will be much more interested purchase the property itself and certainly not the offshore company.

Consequently, this option should be eliminated..

2 / Purchase in personal name

In this case we have a no-cost procedure that is very simple to establish, but that does not, however, bring solution your childrens inheritance matters. In fact, after calculation, the inheritance tax would be as much to € 500,000 in the event of the decease of the property owner.

Furthermore, the capital gain tax will be exempt after a total of 15 years. Rental income will be included in the income tax and the CSG / CRDS (Overall Social Contribution). All of them representing around € 10 000 per year.

Consequently, this option should be eliminated.

3 / Real Estate Company "SCI"

While the real estate company allows the elimination of the inheritance tax, toward the childrens, the tax law that applies to it is the same law that applies to buying property in ones own name. This means an additional €10,000 per year in income taxes and the capital gain tax would be exempt after a total of 15 years.

Consequently, this option should be eliminated.

4 / Our Alternate: Our company solution

Our optimum suggestion is the creation of our company solution. In this case, Mrs being owner of 90% of usufruct (lifetime interest), and Mr being owner of 10% of usufruct (lifetime interest) "Mr." may then keep all the company control.

On the other hand, Mrs could possibly be responsible for income tax. The two children will have the nue proprit (underlying freehold interest) of the company shares.
This will allow us to eliminate the inheritance tax in the case of decease of the property owner.

The Company will be reliable for income tax but only in the professional furnished renting category.

Thanks to this we are able to eliminate the capital gains tax after 5 years instead of 15 years.
We will not request an income tax or Overall Social Contribution CSG/CRDS. However, the rental income cannot exceed € 250,000 per year.

This formula allows a yearly reimbursement of the VAT, which represents € 3,000, as well as the purchase of the property which represents around €500,000. However in case of a resale before 20 years, this reimbursable VAT would need to be repaid on twentieth part basis. For example, if you resell your house after 6 years you will have to pay 14/20 out of €500,000, that being € 350,000.

Furthermore we can eliminate the property tax (€3,000 per year) and possibly land tax for a period of 5 years (check the local regulations).

Another main point to highlight is the wealth tax (ISF)

With a €3 000 000 loan set out to purchase a €3 000 000 property Mr is not held responsible to pay the wealth tax for the first 3 years of ownership. However, if the property value increases by 10% a year, during these three years, the property value rise from € 3,000,000 to € 3,993,000, and by consequence, and in spite of the loan, "Mr." will be held responsible to pay a wealth tax on the extra € 993 000.
Given that this property would be the principal professional source of income for "Mrs.", the incomes of stock exchange capital, etc., would not be considered as an activity income. Therefore, as of the 3rd year, we can allow the rental activity to be considered the principal activity, and therefore be exempt of the wealth tax.

Our fees for installation and accounting are the following :

€ 5,000 ex VAT for the company creation
€ 5,000 ex VAT for the reimbursement of the VAT (1% out of €500 000)
€ 3,000 ex VAT per year for the accounting, fiscal and legal declarations
€ 1,500 ex VAT to close the company.

Annual operating statement

Rents	180 000

Charges		30 000
Plane travel for Mr. and Mrs.	6000
Car cost	2000
Maintenance cost for the house	15 000
Energy cost	4 000
Accountancy fees	3 000
Loan interest 4% X 3 000 000	120 000
Devaluation of the house
3 000 000 X 80% = 2 400 000 on 20 years	60 000
		210 000 -180 000
Déficit	-30 000

	Offshore Company	Personal Name	Real Estate Company SCI	Our Solution
Annual Cost
Accountancy Management	20 000	1000	1500	3000
Income Tax	0	6000	6000	0
Overall Social Contribution CSG - CRDS	0	3300	3300	0
VAT Recoverable	0	0	0	-3000
Property Tax	3000	3000	3000	0
Land Tax (See local regulation)	3000	3000	3000	1500*
3% Tax	90 000	0	0	0
Total annual cost	116 000	16 300	16 800	1500

Cost during purchase
Company Installation	40 000	0	1500	5000
VAT recoverable	0	0	0	-500 000
VAT property work				-20 000
Coût	40 000	0	1500	-515000

Cost for resell after 6 years
Resell price : 5 000 000 euros after 6 years	600 000	600 000	600 000	0
Capital gains (-10%) on 2 000 000 euros
Company end up	40 000	0	1500	1500
VAT repaid14/20th X 500 000				350000
Cost	640 000	600 000	601 500	351500
Total cost after 6 years	1 376 000	697 800	703 800	-154500

Cost for resell after 10 years
Resell price: 6 000 000 euros	499 950	499 950	499 950	0
Capital gains 3 000 000 (-50%)
VAT repaid 10/20th X 500 000				250000
Total cost after 10 years	1 739 950	662 950	670 950	-248500

Our formula, compared with the Personal Name purchase allow a €850 000 saving after 6 years and €910 000 after 10 years.

Summary