French system of Capital Gains Tax

Sam Okoshken is an American lawyer practicing in Paris and has given a few pointers on Capital Gains Tax;

"We anticipate some refreshing legislative policy changes under President Sarkozy’s initiative. However, the set of tax rules that will probably not change appreciably, as they have recently been revamped, are the capital gains rules affecting sales of French real estate.

What’s the rate?
Let’s start with the capital gains tax rate. What rate do you pay if you sell your French property? It depends on where you reside: the rate is 16% for residents of EU countries (except France ), 27% for residents of France (the sale of your principal residence in France is totally tax-free), and 33.33% for non-EU residents, such as US residents. Americans must also report the capital gain to the US, using US capital gains rules, but they can write off the French tax against the 15% US tax.

Figuring appreciation
How is the French tax on appreciation calculated? You can work out the gain by subtracting your sales proceeds from your cost. Special rules apply to what categories of capital improvements can be taken into cost in computing the gain. The rules are detailed, but generally speaking, only major structural changes and improvements affecting your enjoyment of the property, such as heating or air conditioning, are counted. Bills and receipts must be produced to justify these expenses. After the fifth year of ownership, a 15% flat addition to cost in lieu of proof of actual expenditures is possible. In short, the French rules are less liberal than the US rules.

A sweetener offered by the new law is that, beginning after the fifth year of ownership, the amount of your taxable gain is reduced by 10% per year. This means that, if you sell in the eighth year of ownership (i.e., after seven full years), the taxable portion of the gain is only 80% (10% per year tax-free for the sixth and seventh years). After 15 years of ownership, you pay no capital gain tax at all. Of course Americans still have their US tax to worry about, along with another concern: they must translate the purchase price, any improvements they’ve made, as well as the sale price, into US dollars, so in periods of a falling dollar, the capital gain in dollar terms may be much larger than in euro terms."

Disclaimer: Tax law is complex and every effort has been made to offer information that is current, correct and clearly expressed. The information in this summary is intended to be no more than a general overview of the position and certain details have been deliberately omitted. The contents of this page should not be taken as an authoritative statement of French tax law and practice. Neither the author nor the publisher are responsible for the results of actions taken on the basis of information contained in this summary, nor for any errors or omissions. This text is not intended to render legal, accounting or tax advice. Readers are encouraged to seek professional advice concerning specific matters before making any decision.