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What are the financial implications of a second home?


Second home in Provence

The ownership of second homes in France is commonplace. There are almost 3 million homes declared as second homes, and this figure is rising all the time. Despite this, the legal and tax implications of buying a second home as opposed to a main residence are still often poorly understood. In France, this distinction has many implications, not least for the tax obligations of homeowners. Here's a quick overview of the main differences between buying a principal residence and buying a second home.


Differences between primary and secondary residences


First of all, let's remember the difference between a principal residence and a second home: a second home is a property that is used occasionally, in addition to a principal residence, which must be used for at least 8 months of the year.


Tax schemes to encourage home ownership


There are a number of factors that differ depending on the status of the property concerned, but we will focus here on the most important in terms of financial risk, so as not to drown out the discussion.


Taxation of capital gains on resale


In the case of a principal residence, the seller is exempt from tax regardless of how long the property has been held, whereas for a second home, you have to wait 30 years for total exemption. Between 5 and 30 years, there is a flat-rate tax regime of 19%, plus social security contributions at the overall rate of 17.2%.


An allowance is applied for each year of ownership beyond the 5th year, which reduces the taxable capital gain. This allowance is 6% per annum for years 6 to 21, then 4% for subsequent years up to the 30th year.


Note that if the proceeds of the sale are used to finance the purchase of a principal residence, the seller is not required to pay the capital gains tax.


Impôt sur le Fortune Immobilière (IFI) (Property wealth tax)


When calculating the IFI base, the principal residence is subject to a 30% allowance. Second homes, on the other hand, do not benefit from any allowance. It should be remembered that you are eligible for this tax from a property value of €1.3 million.


Local taxes


Council tax


While all households should see this tax disappear very soon, this exemption does not apply to second homes.


Property tax


Property tax on built-up properties is one of the main property taxes in France. Owners of second homes are liable for this tax, the amount of which varies according to the cadastral rental value of the property.


Council tax on vacant homes (THLV)


This tax is levied exclusively on second homes. It applies to all dwellings not let for an extended period. It generally applies in all areas where there is ‘a serious imbalance between housing supply and demand’ (see www.impots.gouv.fr). There are certain circumstances in which it can be waived, particularly if the vacancy is involuntary.


Finally, it should be noted that some regions in France may apply other specific tax regimes to second homes, depending in particular on land pressure and local housing policy.


Renting out your second home


Mandatory declaration


Many buyers want to rent out their second home to cover their costs and even make a profit on their purchase. It is important to note, however, that the property must be registered with the local council and the tax authorities, and the owner must comply with the rules governing the letting of furnished holiday accommodation. The property must be registered in accordance with the registration procedures laid down by your local council.


Revised tax allowances for furnished tourist accommodation


As a reminder, the government recently lowered the tax allowances for short-term lets:

In a high-tension zone, the flat-rate allowance is 30% (compared with 71% previously).

Outside a high-tension area, the allowance remains unchanged at 71%.

For principal residences, the formalities are much less restrictive outside the major tourist towns, but you are limited to 120 days per year. Some towns and cities, such as Paris, Bordeaux and Toulouse, now require online declarations.


Home insurance


Additional insurance costs


You might not think about it, but insuring your second home costs more. They are often unoccupied for long periods, which can increase the risk of certain claims such as theft, water damage or weather-related damage.


Increased risks and claims


Insurers also believe that in the event of a claim, it will take longer to make the premises safe. The consequences of a claim are therefore more likely to worsen if no-one can intervene quickly.


Influence of location


Finally, location can also influence the cost of insurance, because if the property is located in an area at high risk of flooding or forest fires, this can result in higher insurance premiums.


Conclusion


Buying and owning a second home in France offers a range of benefits, but it also comes with significant financial considerations. While second homes can provide an idyllic haven for getaways and holidays, owners need to be aware of the associated tax implications, taxes and insurance costs. In addition, the decision to rent out the second home also has significant tax and regulatory implications. By understanding these financial aspects, owners can make informed decisions and maximise the benefits while minimising the potential costs associated with owning a second home.

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