property tax – Withholding tax, establish your net property income in 2018-2019

01-10-2018

Subject to legislative, regulatory or jurisprudential modification.

The withholding tax (PAS) on income tax raises many questions from our fellow citizens. Concerning landlords in particular, if they did not understand the rules for deducting expenses/works following the implementation of the PAS, they quickly agreed that they were not going to do so in 2018 and 2019, and that they would be cautious in 2020.

In order to avoid certain tax breaks while still allowing the possibility of deducting the work, the Bercy services have come up with different types of charges/work: controllable, recurring, and emergency. They have also set up the “due date” criterion, and the so-called “average” rule. Let's try to understand following the publication of the notices in the official bulletin of public finances (BOFiP)(1).

• In which cases are the rules to be followed applicable?

The provisions of the PAS applicable to net property income only apply if the taxpayer is subject to the actual tax regime. Taxpayers who have opted for the “microfoncier” regime with the flat-rate deduction of 30% are therefore excluded.

• What charges are involved?

The rules applicable to withholding tax deviate from common law for determining net property income for 2018 and 2019. Two types of charges must then be distinguished according to their “recurring” or “controllable” nature.

“Recurring” charges

They group together “the property charges that the lessor owes each year for the rented property” and on which “in principle, it cannot influence.” Two criteria are retained: the periodic nature of the charge, but also the lack of control over the due date of the resulting debt. Thus, a restrictive list could be drawn up:

• insurance premiums;
• provisions for expenses, included or not in the joint ownership's forecast budget, and reduced by provisions deducted the previous year (which correspond to non-deductible expenses);

• taxes, other than those collected by local authorities (annual tax on offices, commercial and storage premises in Île-de-France, excluded);
• interest on debts;
• the costs of remunerating caretakers and concierges, legal costs and fees paid to a third party for the management of buildings;
• expenses incurred by a real estate investment fund for its operating and management costs.

“Controllable” loads

They are understood as work expenses for which the lessor controls the schedule of completion and the year of allocation. This then involves, excluding construction, reconstruction and extension work, the following:

• repair and maintenance expenses;
• expenditure on improving residential premises;
• expenses for improving commercial or professional premises for the purposes of protection against asbestos, accommodating the disabled.

However, expenses for improvement, construction, restoration or maintenance specific to rural properties (Cf. art 31 CGI) are accepted.

• What are the deduction terms for 2018 and 2019?

Property charges are in principle deducted in full as they are actually paid by the taxpayer, regardless of the financial year to which they relate. However, by way of exception, the deduction methods differ from this rule of common law, depending on the “recurring” or “controllable” nature of the charges concerned.

Exceptions for “recurring” charges for 2018

A land charge relating to a debt whose normal maturity occurs during the year 2018 can only be deducted for the determination of the taxable net land income for the year 2018. This is the maturity date of the debt, i.e. its legal or conventional requirementwhich counts and not its actual payment.

Let's take the case of an insurance premium whose due date notice mentions the year 2018: it can only be deducted for the 2018 financial year, even if the actual payment is made in 2017.

Ex: insurance premium of €100, notice received on December 12, 2017, due date mentioned: January 5, 2018 for an insurance period from January 5, 2018 to January 5, 2019.

• Whether the payment is made in December 2017 or January 2018, the deduction will be made for the 2018 financial year.

Similarly, for calls for funds from a co-ownership whose due date has been set by the general meeting: if a landlord receives a call for funds in September 2018 for the 4th^e quarter of 2018, and the due date of which was set for 1^er October 2018, the deduction must be made for the year 2018 even though the lessor only paid in January 2019.

According to the same principles, the year in which the tax is established is not taken into account, but its due date; loan interest is deducted according to the date appearing on the loan schedule; the deduction of administration and management costs is based on the contract given to the taxpayer (rental management mandate, fee agreement, etc.)

Exceptions for “controllable” charges in 2019, directly borne by the taxpayer (2)

Preliminary note: the deduction of controllable charges in 2018 is carried out according to the common law conditions for determining net property income.

The previously listed controllable expenses are assessed overall over the years 2018 and 2019 by averaging the amounts of deductible expenses over these two years. This is the average rule:

“The amount of work expenses allowed as a deduction for determining the taxable net property income for the year 2019 is equal to the average of the charges of the type respectively incurred during the years 2018 and 2019”.

• Please note: these provisions apply to each rental property.

Ex: A landlord pays in 2018 for roof repair work on a rental property for a total amount of €30,000 and in 2019 for renovation work on the same property for an amount of €15,000.

To determine the taxable net property income for 2018, the taxpayer may deduct the entire expense, i.e. €30,000 (application of ordinary law). To determine the taxable net property income for 2019, the taxpayer may deduct an expense of €22,500, corresponding to the average of the work expenses paid during the years 2018 and 2019 ((30,000 + 15,000) / 2).

Thus, part of the work is indeed lost by the lessor. However, through the effect of the carry-forward losses, the situation can be used to the latter's advantage when the charges for the year 2018 are twice as high as the rental income + €10,700 (Cf. March issue 25 Million Owners).

In some cases, the “average” rule does not apply in order to take into account the taxpayer's situation. Thus, for the year 2019, the following are fully deductible:

• emergency works: force majeure (natural disaster, vandalism, malfunctioning equipment no longer allowing the property to be rented, etc.), ex officio decision of the trustee, following a court decision (e.g.: danger order);
• work carried out on a building classified or registered in 2019 as a historic monument;
• work carried out on buildings acquired in 2019

Ex: A lessor pays in 2018 for thermal insulation work on a first rental property for an amount of €6,000. On this same property, €4,000 of expenses corresponding to work not of an urgent nature are also carried out during the year 2019.

This taxpayer acquired a second building in March 2019, which he rented out in June 2019, after having carried out and paid €4,000 for various works. To determine the taxable net rental income for 2018, the taxpayer can deduct the entire expense, i.e. €6,000 (application of ordinary law) for the first rental property. To determine the taxable net rental income for 2019, the taxpayer can deduct:

• for the first rental property: a charge of €5,000, corresponding to the average cost of works paid during the years 2018 and 2019 ((6,000 + 4,000) / 2)
• for the second rental property: a charge of €4,000, corresponding to the total cost of works paid on this property acquired in 2019.