Distinguishing between tax deductible and non-deductible building works carried out by a landlord on a rental property.
Under Article 31 of the French Tax Code, the tax authorities distinguish between three main types of building work carried out on rental properties:
- Repair and maintenance ;
- Improvements ;
- Construction, reconstruction and extensions.
Only the first two of these works are tax deductible (for those who use the régime réel), but the line between all of them is often rather thin, and in the absence of a precise legal definition the issue is a frequent cause of litigation.
In a case that was recently heard in the Supreme Court, the Cour de Cassation, a couple had purchased a 3-storey property measuring 500m2, for the sum of €80,000.
The property was described as uninhabitable, "being currently in ruins".
The couple carried out major works to the property and claimed over €300,000 as being tax deductible against rental income.
Under French law it is possible to carry forward deficits on an unfurnished rental property for 6 years against total income and for a further 10 years against rental income. For furnished lettings, and for small landlords, the roll-over period is 10 years against rental income. The rules on both require detailed consideration.
Following an investigation of the accounts of the couple, the tax authority decided that some of the works amounted to construction and extension work and that they were, therefore, not all tax deductible.
According to the administrative doctrine, repair and maintenance expenses are those whose purpose is to maintain or restore a building in good condition and to allow it to be used normally, in accordance with its purpose, without changing its structure, layout or living area.
Improvement expenses are stated to be those incurred to add new elements or equipment to the property without changing its structure.
The same doctrine states that reconstruction works are those which :
- Make a significant modification to the structure of the property;
- Internal works which, by their importance, are equivalent to reconstruction work;
- Those which, like an extension, have the effect of increasing the volume or living area of the existing premises.
Internal works can "only be considered as reconstruction work if it affects the shell or if it results in an increase in volume or living space."
Although the couple carried out extensive works of replacement to the property, including a new roof, flooring, electrics, plumbing, insulation and staircase, at no point did they undertake reconstruction of the walls or foundations, and neither was there any increase in the living space of the property.
The court therefore concluded that the works carried out by the couple amounted to repair and maintenance and improvements works. Although some of the work was of a structural nature, the court considered that such works were indistinguishable from the repair and improvement works.
The works could not be considered to be reconstruction, as they did not affect the main structure, and neither was it proven that the works created new living space.
As a result, the court ruled that all of the works carried out by the couple were tax deductible.
