The Two Tax Regimes for Rental Income
When you rent out a property unfurnished in France, the rent collected constitutes rental income (revenus fonciers) subject to income tax. Two regimes are available: the micro-foncier and the regime reel (actual expenses regime). The choice between these two regimes has a considerable impact on your taxation and should be analysed carefully.
Rental income is subject to your marginal tax rate (0%, 11%, 30%, 41%, or 45%) and to social contributions of 17.2%. For a taxpayer in the 30% bracket, the total tax rate reaches 47.2% on net rental income.
The Micro-Foncier Regime
The micro-foncier regime applies automatically when your gross annual rental income does not exceed 15,000 euros. It offers a flat-rate deduction of 30% intended to cover all your expenses.
For an annual rent of 10,000 euros:
- Taxable income: 10,000 x 70% = 7,000 euros
- Income tax (TMI 30%): 7,000 x 30% = 2,100 euros
- Social contributions: 7,000 x 17.2% = 1,204 euros
- Total tax: 3,304 euros, or 33% of gross rental income
The micro-foncier is advantageous when your actual expenses represent less than 30% of your rents -- that is, when the property is in good condition, has no outstanding mortgage, and carries low co-ownership charges.
The Regime Reel: Deducting Your Actual Expenses
The regime reel allows you to deduct all your actual expenses from gross rental income. It is mandatory above 15,000 euros of rental income and can be chosen by option below this threshold (with a 3-year commitment).
The main deductible expenses are:
- Loan interest: often the largest expense in the early years of the mortgage. On a 150,000-euro loan at 3.5% over 20 years, first-year interest amounts to approximately 5,100 euros.
- Maintenance, repair, and improvement works: facade renovation, boiler replacement, roof repair, electrical upgrades.
- Property tax (taxe fonciere) (excluding the waste collection tax, TEOM, which is recoverable from the tenant)
- Insurance premiums: landlord insurance (PNO), rent guarantee insurance (GLI)
- Management fees: agency fees, accounting costs
- Non-recoverable co-ownership charges
- Legal costs in the event of a dispute with a tenant
Using our example with 10,000 euros in annual rent and actual expenses of 6,500 euros (including 4,000 euros in loan interest):
- Net rental income: 10,000 - 6,500 = 3,500 euros
- Income tax (TMI 30%): 3,500 x 30% = 1,050 euros
- Social contributions: 3,500 x 17.2% = 602 euros
- Total tax: 1,652 euros, or 16.5% of gross rents
The saving compared to the micro-foncier is 1,652 euros per year in this example.
The Property Loss Offset: A Powerful Tax Lever
When your deductible expenses exceed your rental income, you create a property loss (deficit foncier). This loss can be offset against your overall income up to a limit of 10,700 euros per year (excluding loan interest). The excess and the portion related to loan interest can be carried forward against rental income for the following 10 years.
Example: you receive 8,000 euros in rent and carry out 25,000 euros in renovation works, plus 3,000 euros in loan interest and 2,000 euros in routine expenses.
- Rental income: 8,000 euros
- Expenses excluding interest: 25,000 + 2,000 = 27,000 euros
- Loan interest: 3,000 euros
- Total deficit: 8,000 - 27,000 - 3,000 = -22,000 euros
Loan interest (3,000 euros) is first offset against rental income. Then the remaining expenses (27,000 - 5,000) create a deficit of which 10,700 euros can be offset against overall income. The remainder (11,300 euros) is carried forward against future rental income.
For a taxpayer at a marginal rate of 30%, offsetting 10,700 euros against overall income generates an immediate tax saving of 3,210 euros (excluding social contributions).
Deductible vs. Non-Deductible Works
The distinction between deductible and non-deductible works is crucial:
Deductible (maintenance, repair, improvement): boiler replacement, plumbing overhaul, facade renovation, lift installation, electrical compliance, thermal insulation.
Non-deductible (construction, reconstruction, extension): building extensions, converting a garage into living space, raising the building height, altering the load-bearing structure. These costs are added to the acquisition price and reduce taxable capital gains upon resale.
Filing Your Rental Income Return
The return is filed using form 2044 (regime reel) or directly on the main income tax return 2042 (micro-foncier). Under the regime reel, each expense item must be detailed and substantiated.
Keep all supporting documents for at least 3 years after the last year of loss carryforward (up to 13 years in some cases). In the event of a tax audit, the authorities may request works invoices, mortgage amortisation schedules, co-ownership charge statements, and property tax notices.
Tax Optimisation Strategies
To optimise your rental income taxation, several strategies are available. Spreading works over several years maximises the use of the 10,700-euro property loss ceiling. Switching to furnished rental (LMNP) changes the income category (business income, or BIC, instead of rental income) and opens up accounting depreciation. Finally, investing through an SCI subject to corporate tax can be appropriate for substantial portfolios, allowing property depreciation and a tax rate capped at 25%.