LMNP: What Might Change in Taxation Next Year

An amendment to the 2024 Finance Act provides for the elimination of tax benefits for non-professional furnished rental property owners (LMNP).

The LMNP (Non-Professional Furnished Rental) status was originally designed as a tax regime offering benefits to property owners who rent out furnished units. As an LMNP, you could take advantage of a tax reduction, reclaim the VAT on the purchase of a new home, and benefit from simplified rental management.

For your tax return, you had two options: report your rental income as industrial and commercial income (BIC) under the Micro-BIC system, or report your BIC under the actual income system.

The micro-BIC tax regime allowed you to benefit from a flat 50% deduction on your rental income, with the possibility of reaching 71% for furnished tourist rentals in classified tourist residences. To be eligible for the micro-BIC regime, your annual rental income had to be less than 23,000 euros for all members of your tax household. This regime was attractive because it greatly simplified income reporting, as the tax authorities automatically calculated the tax owed. However, the micro-BIC regime was particularly advantageous when your expenses did not exceed 50% (or 71%) of your income.

If these conditions were not met, it was better to opt for the actual-cost method, which allowed you to deduct all rental-related expenses and costs from your taxable rental income. For example, you could deduct condominium fees, repair costs, furniture purchase costs, loan interest, taxes, etc.

High-tax-burden property owners generally found the “réel” tax regime to be in their best interest, as it helped keep their tax burden from increasing. However, the “micro-BIC” regime offered welcome simplicity, thereby avoiding calculation errors and the hassle of managing expenses.

According to the authors of the amendment, the new tax rules “reintroduce depreciation into the calculation of capital gains on the sale of furnished rental properties used for non-business purposes” and correct an “anomaly.” Specifically, “the ability to deduct depreciation during the lease term and not to take it into account when calculating the capital gain at the time of sale,” whereas in the case of unfurnished rentals, the deduction of depreciation is not permitted. They believe their amendment corrects this inconsistency.

Individuals offering furnished rentals are therefore losing a major advantage. To better understand this, here is an example provided by Christophe Duprat, CEO of Qlower:

Let's take an apartment purchased in 2015 for 150,000 euros, which has benefited from depreciation of 68,000 euros over a 10-year period.

Due to a 30% increase in market value over the past 10 years, the apartment is now worth 195,000 euros.

In 2023, the capital gain amounts to 45,000 euros (195,000 - 150,000).

However, in 2024, under the new calculation rule, the capital gain will amount to 113,000 euros (195,000 - [150,000 - 68,000]).

In summary, the calculation of capital gains will be increased by the amount of depreciation already deducted. Consequently, homeowners who have rented out their furnished homes for 10 years—and who, until now, were able to depreciate their property to reflect wear and tear over time—will no longer be able to do so. The adoption of this amendment in the 2024 budget bill will result in a significant increase in capital gains taxes.

Worse still, for individuals who have invested in energy-efficiency renovations to their furnished rental properties, the expenses will be offset by depreciation. In this case, the improvements made to the units will yield no economic benefit. 

Many disappointed investors might be tempted to sell in a rush before December 31, 2024—without proper preparation—to avoid excessive capital gains taxes. Let’s hope the new rules won’t be applied retroactively to current LMNP properties. It would make sense for this reform to apply only to future owners of LMNP properties or to current owners of unfurnished rental properties who switch to furnished rentals.