Under the system of capital gains tax on real estate, relief is granted against the tax for building works carried out on the property.
Eligible works include those which increase the size of the property or which bring about improvements. Repairs and maintenance are specifically excluded, although some major works, such as rewiring, would be considered an improvement, and therefore eligible.
Relief is granted by adding the cost of the works to the purchase price and the total then deducted from the sale price (less other allowances) to arrive at the net capital gain.
There is complete exemption from capital gains tax on the sale of the principal residence, so the rule is not applicable in such cases.
Normally, for residents to obtain relief on the sale it is merely necessary to present the invoices to the notaire, who will decide which invoices they can accept and then undertake the calculation.
Non-residents outside of the EEA are required to appoint (at their own cost) a tax representative who will require that, not only should invoices be presented, but that the seller should also provide proof of payment, normally by bank statements.
If the bank statements are not available, as is often the case for works carried out many years previously, the deduction will not be granted, or the tax representative may insist on retaining a proportion of the net proceeds until the expiry of the 3-year tax control period.
Géraud Nayral, of French tax partners Cabinet Budiz, himself a tax agent, considers the requirement to supply banks statements beyond 5 years to be unreasonable, but that "in the absence of a change in the law the situation is a difficult one. However, with the agreement of the client, the requirement for bank statements can sometimes be circumvented."
It is also possible during the control period for the tax office to review the case and to demand proof of payment from residents.
In a case that was recently heard in the courts, a property investor purchased a property in Strasbourg for €367,000. He converted the property into 3 flats, with costs totalling €294,000, which he sold in 2015.
Although the owner produced 23 invoices for the works carried out, a large number of them were settled in cash, to a company based outside of France.
As a result, the tax office stated that the invoices were “without justification” and only agreed to a proportion of them: €10,526 instead of €80 828 for the first apartment, €10,526 instead of €84,657 for the second apartment and €7,184 instead of €74,252 for the third apartment.
The owner contested their decision in the local tribunal but was unsuccessful, and so he lodged an appeal.
In a judgement handed down this month, the Cour administrative d’appel (CAA) sitting in Nancy confirmed the judgement of the lower court that the investor had not supplied sufficient proof that he had paid the invoices, stating: “By merely producing photographs of the work of the building, the technical diagnoses of the property at the time of its acquisition and at the time of its disposal and the act of acquisition (...), the applicant does not justify the fact that he actually incurred the costs of the work corresponding to the 23 invoices referred to above.”
The investor tried to prove his good faith by listing all the cash withdrawals made from his account, but the judges considered that these withdrawals of money at dates close to those of the invoices did not show that the amounts had been used to pay for the work.
According to the tax code, “it is for the taxpayer to justify that they personally and effectively incurred the expenses of the works”.
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