How do you report bare ownership for tax purposes?

Investing in a split-ownership arrangement offers a favorable tax framework, but it is essential to properly report your bare ownership investment to the tax authorities by following the specific rules governing this type of investment.

Investing in a split-title arrangement allows for the division of bare ownership and usufruct, which are the two rights that constitute full ownership. 

Under this arrangement, the bare owner owns the property but does not have the right to use it for a contractually defined period, while the usufructuary has the right to use the property and manages all rental operations, while collecting the related income. At the end of this period, the bare owner automatically regains full ownership of the property at no cost and may then choose to rent it out, sell it, or live in it, depending on their goals.

The tax framework for bare ownership is particularly attractive, featuring an exemption from the Real Estate Wealth Tax (IFI), no property tax, and tax benefits on capital gains upon resale. These favorable tax provisions make it possible to build and grow a solid net worth while reducing the tax burden.

As with any investment, an investment in bare ownership must be reported annually to the tax authorities. For investments made with a loan, the interest on the loan is deductible from current and future property income. For taxpayers subject to the IFI (wealth tax), registration of the bare ownership is mandatory but has no tax implications, since this investment is not included in the taxable base. Furthermore, since the bare owner does not receive any rent, they are not subject to tax on that income.

To deduct loan interest, the bare owner of a property leased by a usufructuary must file a declaration known as “2044 SPECIAL,” which is an appendix to the standard Form No. 2042. The amount of loan interest related to the acquisition of bare ownership must be specified on line 460 of the 2044 SPÉCIALE form and carried over to the 2042 form. If the bare owner’s overall annual income is positive, it must be entered in box 4BA of the 2042 form. However, if the result is a loss, the bare owner must complete page 7 of Form 2044 SPECIAL and carry over the resulting figures to Form 2042.

With regard to the annual Real Estate Wealth Tax (IFI) return, the filing requirements depend on the taxpayer’s situation. If the taxpayer is a French resident or a nonresident with tax obligations in France, they must file their IFI return along with their income tax return, at the same time and within the same deadlines. If the taxpayer does not file an income tax return, they must submit an IFI return and its attachments using a specific form.

In the first case, where the person who divided the property does not retain the usufruct, the bare ownership is not included in the bare owner’s IFI estate assets and must not be taken into account in calculating the taxable base. However, the bare ownership must be reported on Schedule 2, and the value entered in column 9AB is zero. It must be noted that the property is held in bare ownership in the far-right column of the table in Schedule 2.

In the second case, where the person who divided the property has retained the usufruct, the property is included in the estates of the bare owner and the usufructuary, respectively. Bare ownership must be taken into account when calculating the taxable base, and the outstanding principal of any loan taken out to acquire said bare ownership may be recorded as a liability. Thus, the value of the bare ownership of the property must be recorded as an asset, and the outstanding principal of the loan may be recorded as a liability if a loan was taken out to acquire such bare ownership.

Source: Perl, chaired by Julien Drouot-l’Hermine, is the creator and market leader in bare ownership investments backed by rental usufruct.