What is property depreciation?
Depreciation is an accounting mechanism that spreads the acquisition cost of an asset over its expected useful life. Each year, a fraction of the purchase price is recorded as an expense in the income statement, reducing the company's taxable profit without any actual cash outflow.
In other words, depreciation is a calculated charge (not a cash charge): the SCI deducts a "notional" expense representing the theoretical wear and tear on the property. This deduction reduces the taxable result and therefore the corporate tax (IS) to be paid, while leaving cash flow intact. This mechanism is what makes the SCI subject to IS (impot sur les societes) such a powerful tax optimisation tool for property investors.
It is essential to understand that depreciation is only possible in an SCI subject to IS (corporate tax). An SCI subject to IR (income tax), under the property income (revenus fonciers) regime, cannot depreciate the property. It can only deduct expenses actually paid out: maintenance work, loan interest, insurance premiums, etc.
Component breakdown: the fundamental principle
Since the 2005 accounting reform, a building is no longer depreciated as a single item. The property must be broken down into components, each with its own depreciation period. This method, known as "component depreciation", better reflects economic reality: a roof does not wear out at the same rate as the foundations.
Main components and their depreciation periods
The breakdown varies depending on the nature of the property (apartment building, offices, commercial premises), but the following allocation is commonly accepted by the tax authorities and accountants:
| Component | Share of price (excl. land) | Depreciation period | Annual rate |
|---|---|---|---|
| Structural work (structure, foundations, walls) | 50% | 50 years | 2.0% |
| Roofing (covering, framework) | 15% | 25 years | 4.0% |
| Technical installations (electrical, plumbing, heating) | 20% | 15 years | 6.67% |
| Fittings (partitions, finishes, joinery) | 10 to 15% | 10 years | 10.0% |
The sum of the shares must equal 100% of the price excluding land. The percentages above are orders of magnitude: they can be adjusted by the accountant depending on the actual condition of the property and expert reports.
Land is never depreciable
The land on which the building is constructed does not wear out and cannot be depreciated. It must be separated from the overall price to determine the depreciable base. The land component is generally estimated at between 15% and 30% of the acquisition price, depending on the location. In dense urban areas (Paris, Lyon), the land component can reach 30 to 40%. In rural or suburban areas, it is closer to 10 to 20%. The tax authorities generally accept a 20% land component in the absence of a contradictory expert valuation.
Depreciation method: straight-line
Property depreciation is straight-line: the same amount is deducted each year throughout the depreciation period of the component. Unlike declining balance depreciation (permitted for certain industrial equipment), straight-line is the only method allowed for property in an SCI subject to IS.
The formula is simple:
Annual depreciation charge = Depreciable base x Depreciation rate
Where: Rate = 1 / Depreciation period
Detailed example: a property worth 200 000 euros
Let us take a concrete case to illustrate the full depreciation calculation.
Assumptions
- Acquisition price: 200 000 euros
- Renovation work: 20 000 euros (depreciable on the same components)
- Land proportion: 20%, i.e. 40 000 euros
- Depreciable base: 200 000 - 40 000 + 20 000 = 180 000 euros
- Notary fees: 16 000 euros (depreciable over the main component period, generally spread over 5 years)
Depreciation calculation by component
| Component | Base (180 000 euros x %) | Period | Annual charge |
|---|---|---|---|
| Structural work (50%) | 90 000 euros | 50 years | 1 800 euros/year |
| Roofing (15%) | 27 000 euros | 25 years | 1 080 euros/year |
| Technical installations (20%) | 36 000 euros | 15 years | 2 400 euros/year |
| Fittings (15%) | 27 000 euros | 10 years | 2 700 euros/year |
| Total | 180 000 euros | -- | 7 980 euros/year |
Note: notary fees (16 000 euros) are generally depreciated over 5 years, i.e. 3 200 euros per year for the first 5 years.
Total depreciation charge for the first 5 years: 7 980 + 3 200 = 11 180 euros/year
How depreciation evolves over time
Depreciation is not constant over time as short-duration components reach the end of their schedule:
| Period | Components still being depreciated | Annual charge |
|---|---|---|
| Years 1 to 5 | All + notary fees | 11 180 euros |
| Years 6 to 10 | All (except notary fees) | 7 980 euros |
| Years 11 to 15 | Structural + roofing + technical installations | 5 280 euros |
| Years 16 to 25 | Structural + roofing | 2 880 euros |
| Years 26 to 50 | Structural only | 1 800 euros |
The early years are the most beneficial from a tax perspective. It is during this period that depreciation is highest and the tax saving is greatest.
Impact on the accounting result and tax
Scenario without depreciation (SCI subject to IR, 30% marginal tax rate)
| Amount | |
|---|---|
| Gross annual rents | 10 800 euros |
| Deductible charges | -2 400 euros |
| Loan interest (year 1) | -5 800 euros |
| Net property income | 2 600 euros |
| Tax (30% + 17.2% social contributions) | 1 227 euros |
Scenario with depreciation (SCI subject to IS)
| Amount | |
|---|---|
| Gross annual rents | 10 800 euros |
| Deductible charges | -2 400 euros |
| Loan interest (year 1) | -5 800 euros |
| Depreciation (year 1) | -7 980 euros |
| Accounting fees | -1 500 euros |
| Tax result | -6 880 euros (deficit) |
| IS payable | 0 euros |
In this example, depreciation generates a tax deficit in the early years: the SCI pays no IS. The deficit can be carried forward indefinitely against future profits.
The annual tax saving (compared to the SCI subject to IR) is 1 227 euros in the first year. Cumulated over 10 years, it can represent over 10 000 euros.
The IS deficit carry-forward
In an SCI subject to IS, the deficit has no impact on the partners' personal income (unlike the property income deficit in an SCI subject to IR). It is carried forward without time limit against future profits of the SCI. This is an internal mechanism: deficits reduce IS in subsequent profitable years, but provide no direct tax benefit to the partners.
IS deficit vs property income deficit: do not confuse them
The property income deficit (SCI subject to IR) can be set against the partners' overall income up to 10 700 euros per year. This is an immediate and personal advantage. The IS deficit (SCI subject to IS) stays within the company and only benefits the SCI itself, in future profitable years. The two mechanisms are fundamentally different and are not aimed at the same type of investor.
Depreciation of renovation work
Renovation, improvement or reconstruction work carried out after acquisition is also depreciable in an SCI subject to IS. It must be allocated to the relevant component according to the nature of the work:
| Nature of work | Related component | Depreciation period |
|---|---|---|
| Facade restoration, masonry repairs | Structural work | 50 years |
| Roof replacement | Roofing | 25 years |
| Boiler replacement, electrical upgrades | Technical installations | 15 years |
| Painting, flooring, fitted kitchen | Fittings | 10 years |
| Furniture (furnished letting in SCI subject to IS) | Furniture | 5 to 7 years |
Routine maintenance (minor repairs, cleaning) remains fully deductible as charges in the year they occur and is not depreciated.
The net book value (NBV) trap on resale
Depreciation reduces the property's net book value (NBV or VNC -- valeur nette comptable) on the SCI's balance sheet each year. The NBV equals the acquisition price less cumulative depreciation.
How the trap works
When the SCI subject to IS sells the property, the capital gain is calculated on the difference between the sale price and the NBV (not the original purchase price). Past depreciation therefore inflates the taxable capital gain.
Example with our 200 000 euro property, sold after 20 years:
- Acquisition price: 200 000 euros + 20 000 euros of work = 220 000 euros
- Cumulative depreciation over 20 years: approximately 112 000 euros
- NBV = 220 000 - 112 000 = 108 000 euros
- Sale price (with 1.5%/year appreciation): approximately 270 000 euros
- Taxable capital gain = 270 000 - 108 000 = 162 000 euros
By comparison, if the property had been held directly:
- Gross capital gain = 270 000 - 236 000 (price + fees + work) = 34 000 euros
- After holding period allowances (20 years): taxable IR capital gain virtually nil
Calculating the IS capital gains tax
The 162 000 euro capital gain is subject to IS:
- 42 500 euros x 15% = 6 375 euros
- 119 500 euros x 25% = 29 875 euros
- Total IS = 36 250 euros
If the balance (162 000 - 36 250 = 125 750 euros) is distributed to partners as dividends:
- PFU 30% = 37 725 euros
Total tax on the capital gain = 36 250 + 37 725 = 73 975 euros
In an SCI subject to IR, total tax on the capital gain after 20 years would be approximately 6 000 euros thanks to holding period allowances.
When the trap does not apply
The NBV trap only arises if the property is sold. Strategies exist to avoid it:
- Transfer of shares: donating or bequeathing the SCI shares does not trigger a capital gain on the property. Shares are valued at market value (with a possible discount), and the property's NBV does not come into play.
- Perpetual holding: if the SCI keeps the property indefinitely (letting across multiple generations), the capital gains question never arises.
- Sale of shares instead of the property: selling the SCI shares rather than the property itself can allow negotiation of a price that accounts for the latent tax liability.
Comparison with the actual property income regime (SCI subject to IR)
In an SCI subject to IR, there is no depreciation. The only deductible charges are expenses actually paid out:
| Charge | SCI subject to IR (actual regime) | SCI subject to IS |
|---|---|---|
| Loan interest | Deductible | Deductible |
| Maintenance work | Deductible | Deductible |
| Improvement work | Deductible | Depreciable |
| Insurance | Deductible | Deductible |
| Property tax | Deductible | Deductible |
| Management fees | Deductible | Deductible |
| Property depreciation | No | Yes |
| Accounting fees | -- | Deductible |
The fundamental difference is property depreciation, which exists only under IS. This calculated (non-cash) charge is the main tax advantage of IS. In return, the SCI subject to IR benefits from the property income deficit that can be set against overall income (up to 10 700 euros/year), which can be very advantageous when significant renovation work is carried out.
When the actual property income regime is more advantageous
The actual property income regime (SCI subject to IR) is preferable in the following cases:
- Low marginal tax rate (0%, 11%): tax on rents is low, IS depreciation does not provide sufficient benefit
- Major renovation work planned: the property income deficit that can be set against overall income provides an immediate and personal tax benefit
- Medium-term resale planned: holding period allowances under IR are much more advantageous than the capital gain on NBV under IS
- Property with low rental yield: if rents are low, the IS saving from depreciation is limited
Rules to know to secure the depreciation
Justifying the breakdown
The tax authorities can challenge the component breakdown if it is not justified. It is recommended to:
- Have a breakdown report prepared by a property expert or surveyor at the time of acquisition
- Keep detailed invoices for work to assign them to the correct component
- Document the choice of depreciation periods (professional benchmarks, accounting standards)
Start of depreciation
Depreciation begins on the date the property is put into service (the date it is made available for letting), not the purchase date. If the property is acquired in December but let from March of the following year, the first year's depreciation is pro-rated (9/12 for 9 months of use).
Subsequent renovation work
Work carried out after acquisition must be analysed individually:
- Replacement work on a component: it replaces the old component (which is removed from the balance sheet) and is depreciated over the new component's period
- Improvement work: depreciated over its own period
- Routine maintenance: remains immediately deductible as charges (not depreciated)
Acquisition costs
Acquisition costs (notary fees, transfer duties, agency commission) can be:
- Either capitalised and depreciated (over 5 years or over the main component period)
- Or deducted as charges in the year of acquisition
The choice between these two options is an accounting decision that depends on the SCI's tax strategy. Capitalisation is generally preferred as it spreads the charge over several years and keeps the tax result lower for longer.
Conclusion: depreciation, a powerful but double-edged lever
Property depreciation in an SCI subject to IS is an extremely powerful tax lever that can reduce the taxation of rents to almost zero for the first 10 to 15 years. For investors with a high marginal tax rate, the cumulative saving can represent tens of thousands of euros.
However, this advantage has a deferred cost: depreciation inflates the taxable capital gain in the event of resale, which can cancel out or exceed the savings achieved. The SCI subject to IS with depreciation is therefore a long-term capitalisation tool, ideal for investors who wish to retain their properties, reinvest rents and transfer shares rather than sell.
Before implementing this strategy, have a detailed simulation carried out over your intended holding period with our simulator, then validate the assumptions with your accountant.