Since the 1st of January 2018, the wealth tax (ISF) has been transformed into a tax on real estate wealth (IFI). From now on, it is the net taxable property estate which is evaluated by calculating the amount of the tax on the real estate fortune due by the taxpayer. A new method of taxation that can be optimised, including choosing a suitable mortgage. Further explanations below.
The calculation of the IFI and the rules of deduction
Is the establishment of the IFI, instead of the ISF, an upheaval for taxpayers? In part. Indeed, if IFI and ISF have real similarities, the focus is now on real estate. Only change? No: the taxpayer’s deduction rules are deeply modified. And that’s where financial optimisations are possible, via the mortgage.
The law describes that “The IFI is calculated on the net value of your taxable assets on January 1, 2018, i.e. after deduction of the debts existing on January 1, 2018, provided that they can be justified”. As such, “debts and mortgages contracted by the taxpayer are deductible from the value of real estate property or rights and taxable units or shares, so long as existing on January 1 of the tax year”.
A real estate loan can thus be deducted, and limit the value of the assessed real estate assets. A good solution to not enter the window of taxation (from 800,000 Euros), or to limit it. Because there are five levels of taxation, from 800,000 Euros to the estates worth more than 10,000,000 Euros.
|Fraction of the taxable net worth of the property estate||Applicable Rate|
|Up to 800 000 €||0 %|
|Between 800 001 € and 1 300 000 €||0.5 %|
|Between 1 300 001 € and 2 570 000 €||0.7 %|
|Between 2 570 001 € and 5 000 000 €||1 %|
|Between 5 000 001 € and 10 000 000 €||1.25 %|
|Above 10 000 000 €||1.5 %|
Playing with mortgages to optimise your IFI
Since contracted real estate debts and mortgages are deductible, then credit becomes more than ever an instrument to use to optimise the value of taxable real estate assets and reduce your tax.
Lengthening the duration of your loan can be a solution. With low rates, borrowing over a longer period will logically increase the total cost of the operation … but the taxable value will be lower. Take for example the purchase of a real estate worth 1.5 million euros over 20 years. If you borrow the full amount, then the taxable value will be 1/20 of 1.5 million euros the first year, then 1/10 the second year, etc.
Other strategies are possible to limit this IFI taxation such as the use of furnished rental, division of property, or sell to oneself, via SCI, real estate. In any case, mortgage is the key. Obtained over the time that best fits your investment strategy, and at a reduced rate, it is essential for you to optimise your personal finances.