Ah, France: great cheese, excellent wine, and, unfortunately, a very complicated tax system. If you are one of the lucky souls who own property in France, whether as your primary residence or a pied-a-terre and are a US citizen, this article has the info you need about French property taxes for non-residents and expats.
What Should I Consider Before Buying Property in France?
Buying property in France as a non-resident or foreigner is a long and drawn-out process, and the accompanying French property taxes for expats are no different. It takes at least three months to go through all the red tape—even once you have found the perfect property. Plan on significant notary fees and stamp duty taxes to pay.
Because it takes so long to become a property owner in France and the fees are so high, the info below applies to all owners of property in France that have kept the property for at least one year. This makes the difference between treating the property as a capital gain or not on a US tax return, so it is important to note that.
What Are the US Tax Obligations at Purchase?
Almost none. The IRS doesn’t care about your investment unless you do it through an entity structure in France, which should be discussed with an expert accountant to understand the US reporting requirements involved. You don’t need to report your investment in French property on your US tax return on Form 8938 or the FBAR (Foreign Bank Account Report).
If you invest in a property and rent it out, then you will need to report the income to the IRS. If the property is unrented, all you need to do is keep good records of the purchase and expenses incurred as part of the purchase for when you sell the property.
What Are the US Tax Obligations During Ownership?
Almost none—assuming the property is owned personally and not rented out. The key during this period is to keep good records of the costs of any improvements made. But keep in mind the following situations as well, so that your bases are covered.
Selling Property in France
Much like the process of property purchasing, selling property in France as a non-resident or foreigner is a long and drawn-out process, and it takes at least three months to go through all the red tape.
French Property Taxes for Non-Residents and Foreigners
A French notary will help you through the process of understanding any applicable exemptions, calculate the tax due, and make payment. You may also be required to report the capital gains on your French income tax return. The notary will provide the documents to complete your French return.
The capital gains on the sale of your primary residence in France are not taxable, which is a significant difference from the US taxation of primary residences. Please note the criteria for a property to be your primary residence in France are different than in the US. You should seek advice from a French notary to confirm that your residence qualifies.
The capital gains on non-primary residences are generally taxable in France. Your capital gains are the sales price less your cost basis and selling expenses.
The capital gains tax rate is 19% for everyone, and there are also “prelevements sociaux” that are due at a rate of 17.2% for French tax residents and 15.5% for non-residents. These “prelevements sociaux” are social income taxes, and luckily, the IRS has finally decided that these are allowed as credits on the US return. Expats who have lived in France should check out our comprehensive guide to see if the IRS owes you money for the error they made.
France also allows some additional flat-rate tax reductions based on how long you owned the property. These tax reductions are calculated by the French notary and are not straightforward. However, if you own a property more than 22 years, the sale is exempt from capital gains tax, and if you own a property for more than 30 years, the sale is exempt from “prelevements sociaux.” This is a significant difference from the US taxation of primary residences.
Remember, like-kind exchanges are not allowed for overseas properties.
What About The US Component of French Property Taxes for Expats?
The capital gains are taxable in the US, even on property located outside the US. There are no full exonerations in the US. Your capital gains are the sales price less your cost basis and selling expenses.
The capital gains tax rates are 0%, 15%, and 20%, depending on your taxable income. 0% is the rate for individuals at the lowest US tax rates and is relatively uncommon. 20% is the rate for individuals at the highest US tax rate. Everyone else pays 15%. Some taxpayers will also have to pay Net Investment Income Tax (NIIT) on capital gains. This tax is 3.8% so some taxpayers will pay 18.8% (15+3.8%) or 23.8% (20+3.8%) on their capital gains. The calculation and payment of your US capital gains tax is done with your US tax return for the year in which you sell the property.
For properties located in France, you are allowed a Foreign Tax Credit on your US return for taxes paid to the French government on the sale of your property. This means that you can offset your US capital gains tax due with the French taxes paid. You can only offset the US tax up to the amount of the French tax paid, which means sometimes there is a gap between the US and French taxes due, and you have to pay the difference to the US. This is, unfortunately, not considered double taxation, so the tax treaty cannot help avoid this gap tax.
What Is the US Primary Residence Exclusion?
If you lived in your property as your main home for at least two of the last five years, then you can treat your property as a primary residence. You can exclude capital gains of up to $250,000 on your US tax return ($500,000 if you file jointly with your spouse). This exclusion is allowed to offset gains on any primary residence, no matter where it is located. Any capital gains over $250,000 ($500,000) are taxed as normal capital gains, at 15% or 20% (plus NIIT, if applicable).
Why Might You Owe Tax in the US?
Let’s look at some specific examples of why you might owe US taxes in addition to French property taxes for foreigners.
Exchange rate gains
As a US citizen, the IRS says your currency is USD regardless of where you live or what currency you use. This means that you could owe taxes to the US on your French property just because the exchange rate has changed over the period ownership.
You buy an apartment in Paris that is not your primary residence in 2004 for EUR 500,000, and sell it in 2019 for EUR 495,000. In 2008, your purchase price in USD was $510,000, and in 2019, your sales price in USD 535,000. In France, you have a capital loss. In the US, you have a gain. You don’t pay tax in France, but you have to pay tax in the US. If you assume you are in the 15% tax bracket, your US tax is USD 3,750.
Note that this is just an example. In reality, the USD to EUR exchange rate change is opposite to this example from 2008 to 2019, so you instead would have a larger loss in the US.
Since the US only allows a $250,000 ($500,000) exclusion on the sale of a primary residence, and France allows a full exemption if you have gains over the exclusion amount, you could owe US tax on the sale of your property.
You and your French spouse buy a house in Nice for EUR 500,000, and you live in it so that it qualifies as your primary residence in both countries. You then sell for EUR 1,200,000. You don’t include your French spouse on your US tax return, so you are only allowed the exclusion for yourself ($250,000). You don’t pay tax in France, but you have to pay tax in the US. Assuming the exchange rate is about 0.80 at both purchase and sale, then your USD gain is $437,500 ((1,200,000-500,000)/2/0.8). After the exclusion, you have a capital gain to report on your US tax return of $187,500 (437,000-250,000). Assuming you are not in the highest US tax bracket, with capital gains at this amount, Net Investment Income Tax will be due, so your capital gains tax rate is 18.8% (15% plus 3.8% NIIT). Your US tax on the sale of your primary residence is $35,250.
What Are the French Flat Rate Property Tax Reductions?
France allows some additional flat-rate tax reductions based on how long you owned the property. These kick in after five years of ownership and eliminate capital gains tax after 22 years of ownership and “prelevements sociaux” after 30 years.
Example for a non-resident:
You buy an apartment in Bordeaux that is not your primary residence in 1985 and sell in 2020. You have a capital gain of $200,000. Having held the property for 35 years, you don’t owe any tax in France. However, the US will still tax the capital gain. With capital gains at this amount, Net Investment Income Tax will be due, so your capital gains tax rate is 18.8% (15% plus 3.8% NIIT), so your US tax on the sale of the apartment is $37,600.
A more complex example for a French resident:
You are a French resident. You buy an apartment in Lyon that is not your primary residence in 2001, and you sell it in 2020. You have a capital gain of $200,000. Having held the property for 19 years, you are eligible for a tax reduction in France. However, the US will still tax the capital gain. Your French tax without the tax reduction would be $72,400 (200,000 x 19%+ 200,000 x 17.2%)). The capital gains tax reduction at 19 years ownership is 84%, or $31,920 (200,000 x19% x 84%) and your “prelevements sociaux” reduction is 23.1%, or $7,946 (200,000 x17.2% x 23.1%). So, your actual French tax due is $32,534 (72,400-31,920-7,946). Your US capital gains tax rate is 18.8% (15% plus 3.8% NIIT), so your US tax on the sale of the apartment is $37,600. You are allowed a Foreign Tax Credit for the French taxes paid, but there is a gap between the US tax due and the French tax paid. You have US tax due of $5,066 (37,600-32,534) even though you have paid tax in France. This is not considered double taxation.
Again, this is just an example. The capital gains tax reduction has not been calculated by a French notary and may be different in reality.
Quick Overview of Reporting Requirements for French Property Taxes for Foreigners
- Purchase: None, just keep good records
- During ownership: None if unrented, just keep good records. Report income and expenses for any rented property and keep good records.
- Sale: Report sale on Schedule D and form 8949, claim foreign tax credits for French taxes on form 1116, and either pay the gap between the US and French tax or carryforward your excess foreign tax credits for up to ten years