Real Estate Wealth Tax (IFI)

A focus on real estate assets

Unlike the ISF, which took into account all assets, whether moveable or real estate, IFI focuses only on real estate assets not assigned to a professional activity. Assets such as main or secondary residences, land, shares in real estate companies (SCI), or even assets transferred in trust or placed in a trust, constitute Base of this tax.

The moveable assets, such as furniture, bank liquidity, life insurance contracts (except for the fraction invested in SCPI or OPCI), and securities, are not taken into account. This focus on real estate aims to reorienting taxpayers' investment to sectors other than real estate, in order to boost the economy.

Definition and calculation of the IFI base

The IFI is calculated on the net assets of the fiscal household., that is, the value of taxable property net of debts. The liability threshold remains fixed at 1.3 million euros. For people residing in France, all real estate owned, whether they are located in France or abroad, are taxable. On the other hand, for non-tax residents, only assets located in France are taken into account.

Taxable property and exemptions

Les taxable property include:

• Built and non-built buildings (land, houses, apartments).
• Shares in real estate companies (SAW), real estate investment companies (SCPIs) and collective real estate investment organizations (OPCI).
• Shares and shares of companies with real estate assets not used for professional exploitation.

{{cta-vert-en="/../style-guide"}}

Partial exemptions or total exemption are planned, for example for real estate used for a professional activity or those owned through certain specific structures (GFA, GAF, forest groups). The main residence benefits from a 30% reduction on its market value.

Deductible debts

Only the debts directly linked to assets taxable items can be deducted. This includes:

• Loans taken out for the acquisition of real estate.
• Debts related to improvement, construction or maintenance work.
• Local taxes such as property tax or vacancy tax.

A capping of deductions is applied when the value of taxable assets exceeds 5 million euros and the amount of debts exceeds 60% of this value.

Schedule and terms of payment

The IFI scale is progressive, starting at 0.5% for a taxable base between €800,000 and €1.3 million and reaching 1.5% for assets in excess of €10 million. The IFI statement must be made simultaneously with income tax, with specific payment terms, depending on the amount due.

IFI discounts and caps

Tax cuts are possible in some cases, in particular for donations made to organizations of general interest or for investments in SMEs under certain conditions. However, these discounts have been severely limited since 2018.

{{cta-bordeaux-en="/../style-guide"}}

The IFI cap aims to ensure that the total income tax and IFI do not exceed 75% of the previous year's income, a mechanism that helps avoid excessive taxation of taxpayers with incomes that are relatively modest compared to the value of their real estate.

Analysis and perspectives

The IFI represents a strategic refocusing of Wealth taxation in France On the real estate assets. It encourages taxpayers to diversify their investments and reduce the concentration of wealth in real estate, in the hope of encouraging other economic sectors. However, this reform has drawn criticism, especially over its potential impact on the real estate market, in particular on rental investments.

For some experts, the IFI could encourage the sale of some real estate and a reorientation of capital to others forms of investment. Others, on the other hand, fear that it will put additional pressure on owners, especially in areas where property values are high.

The Impact of IFI on the Real Estate Market

One of main objectives of the transformation of ISF into IF was to reduce the tax burden on capital invested in businesses, while maintaining the contribution of high real estate assets. By focusing only on real estate assets not used for professional activity, the IFI has had several notable impacts on French real estate market.

Reduction in rental real estate investment

Since the Introduction of the IFI, there is a certain reluctance among investors to turn to rental real estate, especially in big cities like Paris, Lyon, or Bordeaux, where real estate prices are high and capped. Since IFI is calculated based on the net value of real estate assets, many potential investors fear that their rental returns will be largely absorbed by this tax.

{{cta-vert-en="/../style-guide"}}

This phenomenon is particularly visible among taxpayers whose real estate assets exceed the threshold of 1.3 million euros, as they are facing an increased tax burden. This situation may cause some owners to sell goods to avoid IFI, which can put downward pressure on real estate prices.

Trend in holding movable assets

At the same time, we note a growing tendency for investors to turn away from real estate and towards moveable assets, such as stocks, bonds, and other financial instruments. Indeed, these assets are exempt from the IFI, which makes them more attractive for taxation. This change in investment strategy was observed mainly among wealthy taxpayers, who seek to optimize their tax situation while maintaining an attractive return on their investments.

Effects on taxpayer behavior

The IFI has also significantly influenced the behavior of wealthy taxpayers.

Tax optimization and relocation

One of the notable effects of the IFI is the rise of tax optimization strategies. Some taxpayers seek to structure their assets in such a way as to reduce their tax base, for example by investing via companies not subject to IFI or by transferring their assets to countries where the IFI does not apply. This trend is particularly marked among French tax non-residents, which are only taxable on their real estate located in France.

A certain amount of tax relocation has also occurred. Some taxpayers have opted to change their tax domicile to countries offering more favorable wealth tax treatment, representing a potential loss of income for French tax revenues.

{{cta-bordeaux-en="/../style-guide"}}

Reorientation of donations and successions

The IFI has also influenced wealth strategies in terms of the transmission of assets. Many taxpayers have chosen to anticipate their donations and successions to avoid excessive taxation on their real estate. For example, some owners have opted for the division of property (donation into bare ownership with retained usufruct), which makes it possible to reduce the taxable value of their assets while maintaining the use of the goods.

Impact on state tax revenue

One of the most debated aspects of the IFI is its impact on State tax revenue.

Initial Revenues Lower Than Expected

In 2018, the first year of the establishment of the IFI, the tax revenue generated by this tax proved to be lower than the government's initial forecasts. While the ISF brought in around 5 billion euros per year, the IFI only reported 1.9 billion euros in 2018, a loss of nearly 3 billion euros for public finances.

This decrease is mainly explained by the reduction in the IFI tax base compared to the ISF. The refocusing on real estate assets alone has considerably reduced the number of taxable households and the overall value of taxed assets. This result has led some critics to question the effectiveness of this tax in generating substantial tax revenue.

Prospects for revenue trends

However, since its introduction, the IFI revenue showed a slight upward trend, reaching around 2.3 billion euros in 2022. This increase is due in part to the appreciation of Real estate prices in France in 2022, particularly in large cities, and by better compliance of taxpayers with their reporting obligations.

{{cta-vert-en="/../style-guide"}}

Future prospects of the IFI

The Future of the IFI will depend on several factors, including the evolution of the real estate market, government fiscal policies and the overall economic situation.

Potential Reassessment of Thresholds and Schedules

One of the possible perspectives for future of the IFI would be a reassessment of tax thresholds and tax scales. The liability threshold of 1.3 million euros could be reassessed upward to adjust the IFI to inflation and changes in real estate prices. Likewise, the progressive tax rates could be modified to take into account changes in the distribution of wealth in France.

Legislative reforms and adjustments

It is also possible that legislative reforms are considered to adjust the base of the IFI. For example, some proposals have been made to extend the tax base to certain financial assets or to introduce more attractive exemption mechanisms for investment in strategic sectors, such as green industry or innovative SMEs.

Stability or repeal?

Finally, the Question of the sustainability of the IFI arises. Some experts suggest that this tax could be repealed in the future due to its limited effectiveness in terms of tax revenue and its potentially negative effects on the attractiveness of French real estate market. Others, on the other hand, plead for maintaining the IFI as a tool for fiscal redistribution, while suggesting adjustments to make it fairer and less complex to administer.

{{cta-bordeaux-en="/../style-guide"}}

Conclusion

Since its creation, IFI Has had significant impacts on the real estate market, the behavior of taxpayers and the State's tax revenues. If he succeeded in refocusing taxation on real estate, it also raised questions about its effectiveness and fairness. Les Future prospects of the IFI remain uncertain and depend on economic, fiscal and political developments. However, it is clear that this tax will continue to be at center of debates on wealth taxation in France in the years to come.

‍