In France the sale of the principal residence is entirely exempt from capital gains tax and social charges.

However, just what constitutes the ‘principal residence’ is a regular source of litigation.

Notable cases we have reported in the past have included instances where the owner has vacated the property before it has been sold, or where they have only occupied the property for a short duration. In both cases the courts took a generous interpretation of the law.

Two further recent cases in the French courts illustrate the difficulties of determining the rules that apply.

Case 1

Over a period of 13 years a couple purchased 9 building plots, on which they constructed new homes, several of which were subsequently sold.

The couple lived sequentially in each of the homes they had constructed and sold, claiming principal residence relief on each sale, a claim that was evidently accepted by the notaire.

However, their case was reviewed by the tax authority, who concluded that the couple were engaged in a business activity and charged them capital gains tax, social charges and VAT on the sales.

In order for a person to be exempt from the taxes, and not be taxed as a property dealer (marchand de biens) they must either demonstrate that:

• The properties sold had been acquired for personal or family needs and their sale was simply part of the management of their personal assets.
• Or that the buildings in question were their main residence.

In addition, the exemption is subordinate to the double condition that the transactions did not proceed from a speculative intent and that they were not of a habitual nature.

The couple unsuccessfully contested their assessment up to the court of appeal, who ruled that the number of transactions carried out over the period, the short period between the completion of the construction work of the houses and their sale, and the fact that even before the sales had been made they had already acquired new land, that the transactions had been carried out with speculative intent.

However, the couple made a final appeal to the Supreme Administrative Court in France, the Conseil d’Etat (CE).

In a decision that many may find surprising the CE overturned the ruling of the court of appeal stating that:

"The mere fact that a taxpayer makes successive acquisitions and disposals of real estate which they allocate to their principal residence, without the tax authority establishing either that they would not have occupied them in that capacity or that those transactions were the result of an abuse of rights, cannot, in view of the exemption for capital gains on the sale of a principal residence, be characterized as an activity of property dealer."

It does seem from the ruling that the tax authority did not sufficiently reason its decision; it simply concluded that the successive sale of properties amounted to a commercial activity which invalidated the principal residence exemption.

Case 2

In a case before the Cour de Cassation in November 2023, an estate agent, who was also involved in construction activities, was the subject of a tax audit when the tax authority considered, in view of the purchase and resale of several properties, that he was engaged professionally in the purchase and resale of property.

As a result, the tax authority imposed additional taxes and social charges relevant to the activity, as well as an 80% tax penalty for a failure to disclose the activity.

According to the investigation, the estate agent sold his personal residence in 2013 and acquired, in the same year, a building comprising premises for professional use and two garages, which he sold on 12 December 2013.

The following year in July 2014, he also acquired a house as his main residence, the ground floor of which was sold on 9th October 2014, the first level on 24th June 2015 and the attic on 4th July 2015. The sales over the three storeys took place in six lots, including three cellars.

Nevertheless, for the court, the plaintiff did not provide sufficient evidence that the property was his principal residence, or that the sales took place for purely personal/family reasons. He therefore lost his appeal.