As of 1 January 2018, the “wealth solidarity tax” (“ISF”) was repealed and replaced by the “real estate wealth tax” (“IFI”). While the basis for the ISF included a taxpayer’s entire asset base, the IFI includes only real estate assets and entitlements.

Taxpayers affected

The assessment applies to the real estate wealth of the tax household, except for spouses that are separated or going through a divorce. The asset base of minor children is assessable along with that of the parents. Even if they are associated with their parents’ tax household for the computation of the income tax, adult children are subject to a separate assessment for IFI. Taxpayers who are affected are French residents for taxation purposes in respect of their world-wide real estate wealth and foreign residents in respect of their French real estate wealth.

Assets included in the computation of the IFI

The IFI is computed on the net value of the taxable asset base as at 1 January of each year (for year 2018, 1 January 2018 will be taken).

Only the real estate assets and entitlements are used in determining the assessable wealth. However, this concept is defined broadly. The real estate assets include the following assets and entitlements, owned by the taxpayer or the members of his household:

– buildings (house, apartment, principal residence, secondary residence, etc.);
– non-built properties (agricultural land, building plots, woods and forests, etc.);
– real estate rights (beneficial interest, right of use, tenant’s right to a construction lease, the lessee’s right to a real estate lease financing agreement, etc.);
– shares in companies at the value of their value representing real estate rights owned directly or indirectly (including, obviously, SCI/SCPI, but also other corporate forms that are not necessarily predominantly real-estate-related companies).

The rules for appraising assessable assets remain unchanged compared with the ISF: market value of the asset as at 1 January, 30% rebate applicable to the principal residence.

As for the ISF, the real estate assets assigned to the exercise of a business activity are, in certain circumstances, exempted from the IFI.

Liabilities deductible from the IFI

Debts that are deductible are those existing as at 1 January and that relate to:

– the acquisition of taxable real estate assets or rights (e.g., loans for real estate);
– paying for improvements, construction, conversions or expansions;
– purchasing shares, in proportion to the value of the taxable real estate assets and rights;
– paying for maintenance actually incurred by the owner or incurred by the owner on behalf of the tenant but for which owner was not able to obtain reimbursement, as at 31 December of the year in which the tenant vacated;
– paying taxes owed for the properties concerned (real estate tax, IFI, office space tax, etc.). Conversely, the assessments for which the occupant is responsible (e.g., the dwelling tax) are not deductible, and neither are the income tax, including the portion corresponding to the real estate revenues.

Where the market value of the assessable wealth is greater than five million euro and the total debts exceed 60% of that amount, the portion of debts exceeding that limit is only 50% deductible from that surplus.

Ex.: Purchase by an individual of a building valued at € 7 mn, financed by a contribution of € 2 mn and a loan of € 5 mn. The € 5 mn debt exceeds 60% of the value of the asset (€ 4.2 mn), and the € 0.8 mn surplus (€ 5 mn – € 4.2 mn) is deductible only at the rate of 50%, which comes to € 0.4 mn (or € 400,000). The total of the deductible debts, therefore, is limited to € 4.2 mn + € 0.4 mn = € 4.6 mn.

Computation of the IFI

The basis of calculation is identical to that of the ISF. The threshold triggering the IFI is determined by the net value of the assessable wealth (Assets minus Liabilities) and is set at € 1,300,000. The applicable scale is as follows:

– up to € 800,000: 0%
– from € 800,001 to € 1,300,000: 0.5%
– from € 1,300,001 to € 2,570,000: 0.7%
– from € 2,570,001 to € 5,000,000: 1%
– from € 5,000,001 to € 10,000,000: 1.25%
– in excess of € 10,000,000: 1.5%

Note that the capping mechanism defined for the ISF is retained. The IFI is capped depending on the taxpayer’s income: the income tax pertaining only to real estate income (including the social security deductions and the special contribution for high incomes) added to the IFI shall not exceed 75% of the income received.

The reduction of ISF for donations to certain bodies is continued for the IFI: attribution to the IFI of 75% of payments up to € 50,000 per year. The reduction for ISF-SME, however, is eliminated, except for investments made up to and including 31 December 2017.

Filing procedures

Unlike what applied for the ISF, there is no longer any special return for estates in excess of € 2,570,000. From now on, all taxpayers affected will be required to fill out form 2042-IFI, which will be attached as a schedule to the tax return (form no. 2042). The real estate wealth tax (IFI) will be collected just as income tax.

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