How does LMNP pay less tax?
In this article, Micco will delve into the tax calculations, filing methods, and the best tax regime to minimize your tax payments for LMNP.
When you rent out your property in France to earn rental income, it's essential to understand the tax implications. Your rental income will be subject to both taxes and social security contributions, which are significant expenses we might not think about when buying.
In this article, Micco will delve into the tax calculations, filing methods, and the best tax regime to minimize your tax payments for LMNP (Location meublée non professionnelle).
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Table of Contents
- Taxation for LMNP: Two Possible Tax Regimes
- Taxation for LMNP under the Micro-BIC Regime
- Taxation for LMNP under the Real Regime
- How Taxable Rental Income for LMNP is Calculated!
- Conditions for Switching from Micro-BIC to Real Regime
- Which Forms to Fill Out for Online Tax Filing for LMNP?
- LMNP Rentals: New €23,000 Threshold?
1. Taxation for LMNP: Two Possible Tax Regimes
In France, renting out furnished properties offers two different tax regimes to choose from. When filing taxes in May, you'll need to pick the best option for you.
Before diving into tax calculations and form filling, let's understand the two possible tax regimes. To grasp this, we'll differentiate between reported rent (actual income) and taxable rent (the rent used by tax authorities to calculate taxes). We're interested in the taxable rent because lower rent means lower taxes.
Please note, this article pertains to non-professional furnished rentals (LMNP). This applies to anyone renting out furnished properties, even if they're regular tenants. Those whose rental income from furnished properties is the main source of income are considered professional furnished property lessors.
If your furnished property rental income represents more than 50% of your income, it's not covered in this article.
2. Taxation for LMNP under the Micro-BIC Regime
Micro-BIC is the simpler of the two regimes. Basically, you just report the received rent.
Before calculating taxes, tax authorities grant a 50% reduction. In other words, the taxable rent will be 50% of the actual received rent.Example:Mr. Louis rented out a furnished property in 2023 and received €10,000 in rent. He chose the Micro-BIC regime when filing taxes in 2024. Tax authorities grant a 50% reduction, making it €10,000 * 50% = €5,000. Thus, his taxable base will be €10,000 - €5,000 = €5,000.
Next, let's discuss the taxation rate on this €5,000. The statutory rate of 50% has been reduced to 30% in the 2024 finance bill. This law will apply to income taxed in 2024 (to be declared in 2025) if passed in its current form.Finally, for those renting out properties assessed as furnished tourist accommodations, there might be a 71% tax rate.
3. Taxation for LMNP under the Real Regime
If the Micro-BIC regime isn't suitable for you, your second option is to be taxed under the real regime.
This regime is particularly attractive because sometimes you might not need to pay any taxes. However, the procedures and filing work are complex, requiring an accountant. As the name suggests, you can deduct the actual expenses you incurred from your rent before being taxed. And that's not all; you can also subtract the depreciation of your property or furniture before calculating taxes. So, you need to report the actual rent received, expenses paid, and depreciation calculation.First, let's look into the list of deductible expenses to ensure nothing is missed. We can list the following expenses:
- Interest on loans used to purchase the property.
- Homeowner's insurance.
- Property tax (since we know garbage fees are the tenant's responsibility, they can't be deducted).
- Borrower insurance for loans and bank fees (processing fees, etc.).
- Accountant fees.
- Works. This article discusses which works can be deducted and which cannot....In addition to these deductions, you can also deduct the depreciation of the property. This is where the accountant is necessary. They'll determine the extent to which you can depreciate the property. If depreciation is calculated by an accountant during a tax audit, tax authorities won't question your declaration.
The impact of deductible expenses and depreciation is as follows.
Example:Mr. Louis purchased a property for €100,000 and added €10,000 worth of furniture. The accountant calculated the property's depreciation period to be 20 years, allowing for a yearly deduction of €100,000 / 20 = €5,000. The furniture's depreciation period is 5 years, allowing for a yearly deduction of €10,000 / 5 = €2,000. Mr. Louis rented out this furnished property in 2023, receiving €10,000 in rent.
Additionally, he paid €500 in loan interest and €1,000 in property tax. If he chooses the real regime, his taxable base will be €10,000 - €5,000 - €2,000 - €1,000 - €500 = €1,500. Tax authorities will calculate taxes based on the taxable rent, so it'll be €1,500 in this case. We use deductible expenses and depreciation to determine the taxable rent.
So, it's necessary to explore the differences between the Micro-BIC and real regimes.
The decision is straightforward: if deductible expenses + depreciation exceed 50% of the rent, then the real regime is more advantageous.
If not, then the Micro-BIC regime is preferred.
In our example, Mr. Louis would be better off choosing the real regime over the Micro-BIC regime. This way, he can deduct €8,500 instead of €5,000. His taxable rent will be €1,500 (Micro-BIC regime is €5,000).
Indeed, we must also consider the accountant fees required by the real regime. These fees are necessary for calculating depreciation and filling out tax returns. Nevertheless, accountants are indispensable. If you have loans and can depreciate the property, rental income will never be taxed because the deduction amount will be significant. Therefore, the tax benefits far outweigh the accountant's fees. For moderately rented properties with no depreciation, accountant fees might be too high to offset tax benefits. Hence, the simpler Micro-BIC regime becomes the preferred choice.
To make the right choice, you need to calculate the taxes you'd owe under both regimes.
4. How Taxable Rental Income for LMNP is Calculated?
Like any income in France, rental income is subject to two taxes: income tax and social security contributions. They'll both be calculated based on the taxable rental income. The social security contribution rate is 17.2%. The income tax rate depends on your highest tax rate: it could be 0%, 11%, 30%, 41%, or 45%. So, rental income is heavily influenced by taxes, as you might need to pay 17.2% social security contributions plus a minimum of 11% income tax. Let's recalculate the previous scenarios.
Tax calculation for renting out furnished properties under the Micro-BIC regime:
Mr. Louis received €10,000 in rent and got a 50%
reduction. Thus, the taxable rent is €5,000. Let's assume his income tax rate is 11%. He'll pay 17.2% in social security contributions: €5,000 * 17.2% = €860. He'll also pay income tax: €5,000 * 11% = €550. So, Mr. Louis will pay a total of €1,410.
Tax calculation for renting out furnished properties under the Real regime:
Mr. Louis received €10,000 in rent and got €8,500 in deductions. Thus, the taxable rent is €1,500. Let's assume his income tax rate is 11%. He'll pay 17.2% in social security contributions: €1,500 * 17.2% = €258. He'll also pay income tax: €1,500 * 11% = €165. So, Mr. Louis will pay a total of €423.
Property income may not be taxed unless there are significant deductible expenses.
The Micro-BIC regime is relatively simple but might result in higher taxes. The Real regime is more complex but generally offers tax advantages.
5. Conditions for Switching from Micro-BIC to Real Regime
Once you've chosen the Micro-BIC regime, it's challenging to switch to the Real regime.
However, there are some situations where this can be done. First, you must choose the Real regime when filing taxes in 2024, which could incur significant costs. Second, you must prove that the Micro-BIC regime isn't suitable for you because your property income is very high, almost unaffected by deductible expenses.
Please note that switching from Micro-BIC to Real regime won't affect your right to depreciation. In any case, you can deduct depreciation for both property and furniture.
6. Which Forms to Fill Out for Online Tax Filing for LMNP?
If you choose the Micro-BIC regime, you'll need to fill out 3 forms for online tax filing in 2024. First, you'll need to fill out Form 2042 C PRO, which contains information about your income and deductible expenses. Then, you'll need to fill out Form 2042, which contains information about your household and other sources of income. Finally, you'll need to fill out Form 2042 C, which contains information about your deductions and tax credits.
7. LMNP Rentals: New €23,000 Threshold?
The French government is considering raising the threshold for the Micro-BIC regime to €23,000. This means that if your property income is less than €23,000, you'll be automatically classified as a non-professional furnished property lessor and must choose the Micro-BIC regime. For those whose property income exceeds €23,000, they'll be able to choose between the Micro-BIC regime and the Real regime.
We hope this article has helped you understand LMNP tax issues better. If you have any questions or need further assistance, feel free to contact Micco.
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