Taxation of Professional Furnished Rental Property Owners (LMP) Under Scrutiny

Professional furnished rental property owners (LMP) will face harsher penalties under new tax guidelines issued by the French Ministry of Finance, particularly regarding the IFI, the real estate wealth tax. 

Since it took effect in January 2018, the IFI (real estate wealth tax) has raised many questions, particularly regarding the exemption conditions set forth in Article 975 of the General Tax Code (CGI).

A ministerial response published on April 9, 2024, provides clarification on these conditions, but it may disappoint professional furnished rental property owners. 

The IFI exemption for furnished rental property (LMP) is subject to two conditions which, when met, allow furnished rental properties to be considered business assets. First, the furnished rental business must be considered the primary business activity. Second, the net income from this activity must account for more than 50% of the taxable household’s business income.

The second condition poses a problem due to the mechanism for deducting expenses and depreciation under the actual income tax system for LMPs, which significantly reduces landlords’ taxable income, thereby making the condition nearly impossible to meet. A member of the National Assembly recently questioned the government regarding the interpretation of this condition.

The ministerial response dated April 9 confirms that, in order to assess the annual net business profit from furnished rental activities, such profit must be understood as “the excess of asset values over the total liabilities consisting of third-party receivables, depreciation, and justified provisions.” Thus, the 50% threshold cannot be assessed based on the amount of revenue, but rather on that same amount, less expenses and deductions.

Consequently, residential properties that are rented out furnished or intended to be rented out furnished and that generate a loss do not entitle their owners to the exemption for business assets provided for in Article 975 of the General Tax Code (CGI). This clarification is therefore likely to penalize professional furnished rental property owners as the deadline for filing their income tax returns approaches—which also coincides with the deadline for filing IFI tax returns. The good news that some professional furnished rental property owners had been hoping for will therefore not materialize in 2024.