The sale of a principal residence in France is exempt from capital gains tax, including social charges.
However, this tax exemption is subject to strict conditions, notably concerning occupation of the property by the sellers, albeit some flexibility is granted if the property was on the market when the occupants vacated.
In this case, a couple were married under the marriage regime of universal community of property, called communauté universelle.
When declaring the sale, the spouses believed they were entitled to a full exemption from capital gains tax, on the grounds that the property constituted their principal residence.
Following a review of their personal tax situation, the tax authorities partially challenged this exemption, limiting it to 50% of the capital gain. The reason lay in the couple’s personal circumstances at the time of the sale.
Separated for several years, the spouses no longer lived together. The wife had continued to occupy the house, while the husband had established his main residence in Toulon.
The tax authorities therefore concluded that the property qualified as a principal residence for only one of the two sellers.
The Supreme Administrative Court, the Conseil d'État, confirmed that when several persons jointly sell a property, the principal residence condition must be assessed individually for each seller, even where the sellers are married and continue to be jointly assessed for income tax.
The exemption therefore applied only to the portion of the capital gain attributable to the share held by the seller who actually occupied the property as their principal residence.
In other words, the fact that the sellers are married and subject to joint income tax does not allow the principal residence condition to be pooled. Each individual situation must be examined separately.
The couple argued that the property had long served as their shared family home and that this past occupation should be taken into account.
The court rejected this argument. Even if the spouses had lived together in the property for many years, only their situation on the day of the sale was relevant for tax purposes.
As a result of the partial loss of the exemption, part of the capital gain became subject to French social charges.
The ruling is relevant not only to French couples but also to international owners of French property.
Nevertheless, it should not be assumed from this case that all separated couples face the same problem, as other cases have also established that where one spouse leaves the family home after separation, provided the remaining spouse continues to occupy it until sale, and the sale occurs within a reasonable period, the tax exemption is available.
Building Costs
The couple also attempted to challenge level of social charges in the capital gain by invoking historical construction and renovation expenses.
On this point as well, the court upheld the lower courts’ analysis. The mere production of a long-dated transaction settlement agreement was not sufficient to establish that the expenses claimed had actually been borne by the spouses. The burden of proof lay with the taxpayers, who failed to provide adequate supporting evidence.
The issue of claiming historic expenses on a property against capital gains tax is a problem on which we receive a great deal of correspondence, and which we discuss in Fiscal Representative for Non-Residents.
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