Everything You Need to Know About Rental Income Taxation

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To evaluate the profitability of a rental investment in France, it is essential to take a close look at the tax implications of your project. Every rent collected generates a tax liability, which is often overlooked by buyers when calculating expenses. However, the taxation of rental income varies depending on the nature of the property (unfurnished or furnished), the tax regime (micro-BIC or actual expenses), and the landlord's status (professional or non-professional). Here is a detailed explanation.

How is the tax on your taxable rental income calculated?

Rental income is subject to two distinct types of taxation: namely, social contributions (prélèvements sociaux) and income tax (impôt sur le revenu):

• The rate for social contributions is fixed at 17.2% of the income generated from the rental property.
• The income tax rate depends on your tax bracket: it can therefore vary from 0 to 45%.

A scale determines the tax rates applied based on the amount of net taxable income. Five tax rates are applied, known as the Marginal Tax Brackets (TMI - Tranches Marginales d'Imposition):

• 0% on income up to €10,084
• 11% on the income bracket from €10,084 to €25,710
• 30% on income from €25,710 up to €73,516
• 41% on the income bracket from €73,516 to €158,122
• and 45% above €158,122

This is a progressive scale : the different rates are therefore applied to each portion of income corresponding to the respective brackets, rather than as a flat rate across the total income. In other words, when the income exceeds the ceiling of a TMI, only the amount exceeding this ceiling is taxed at the higher rate. For rental income, taxation is based on these scales, applied to the amount of rent collected minus deductible expenses.

Taxation of an unfurnished rental

The income derived from renting an empty (unfurnished) property is classified as property income (revenus fonciers) and is subject to two distinct tax regimes: the micro-foncier regime and the actual regime (régime réel).

The choice between the two will depend on the amount of your deductible expenses, and therefore on the difference between your gross rental income and your taxable rental income. One operates with an automatic flat-rate allowance and does not allow for the deduction of actual expenses. The other, while more complex, allows for the deduction of expenses, which can be highly advantageous if they are significant.

Calculating and declaring taxes for an unfurnished rental under the micro-foncier regime

For whom?

The micro-foncier regime applies to the tax household of landlords who receive less than €15,000 in rental income annually, provided the rented properties do not fall under any special tax schemes. The micro-foncier regime is a simplified, flat-rate system. It is not mandatory but is offered for its simplicity to landlords who meet the aforementioned eligibility criteria.

How to declare?

When filing your tax return, the total amount of rent collected must be reported on form n°2042, in box 4BE. You do not need to deduct any expenses: a 30% flat-rate allowance is automatically applied. Under the micro-foncier regime, you are therefore taxed on 70% of the rent collected during the year.

Good to know

The €15,000 ceiling set to benefit from the simplified micro-foncier regime includes all rents collected across all unfurnished rental properties. If you leave the micro-foncier regime to switch to the actual regime, you must wait 3 years before you can return to the micro-foncier regime (provided you still meet the conditions).

Example of tax calculation for an unfurnished rental under the micro-foncier regime

If you collect €10,000 in rent during the year, you declare this amount without deducting your expenses, but the tax rate will only apply to a base of €7,000 under the micro-foncier regime.

• First, the social contributions will be calculated on this sum at a rate of 17.2%, meaning €1,204 to pay.
• On a taxable rental income of €10,000 (€7,000 after the allowance), if the applicable tax bracket rate is 11%, the income tax will be €770.
• The total tax due (Income Tax + social contributions) for €10,000 of rent collected will therefore be €1,974.

Calculating and declaring taxes for an unfurnished rental under the actual regime (régime réel)

For whom?

The actual regime is accessible to any landlord of an unfurnished property, even if the amount of rent collected during the year is less than €15,000. This tax regime is the only one permitted for landlords who receive more than €15,000 in rental income per year. Landlords who have the choice between the two regimes and opt for the actual regime on their tax return are committed to it for 3 years.

How to declare?

Declaring rental income under the actual regime requires filling out appendix 2044 of the annual tax return. The form allows you to declare the property income received, as well as all deductible expenses. If the rented properties benefit from a special status, you must fill out the appendix 2044-S (Special) declaration.

Good to know

The actual regime allows you to calculate the net property income not after a flat-rate allowance, but after the deduction of actual expenses. These include administrative and management fees, repair and maintenance costs, expenses borne by the landlord on behalf of the tenant that are not recovered, improvement expenses, insurance premiums, provisions for condominium charges, property taxes (taxe foncière and annexes), and mortgage interest.

Example of tax calculation for an unfurnished rental under the actual regime

Let's take the example of a landlord receiving €10,000 in annual rent and having €4,000 in deductible expenses. They decide to opt for the actual expenses regime because their expenses exceed 30% of their rental income: after deducting their expenses, their net property income is €6,000.

• The social contributions are 17.2%, equating to €1,032.
• For a Marginal Tax Bracket corresponding to an 11% tax rate, the income tax will be €660.
• The total tax due for €10,000 of rental income declared under the actual regime with €4,000 in expenses will therefore be €1,692.

Which regime is more advantageous for an unfurnished rental?

If your rental income before the deduction of expenses is below the €15,000 ceiling, you can choose between the two tax regimes. The choice will then depend on the proportion of your deductible expenses relative to the amount of rent collected:

• If the share of deductible expenses represents 30% or less of the rent collected, then the micro-foncier regime is more advantageous because it provides a 30% flat-rate allowance regardless of your actual expenses.
• If your expenses exceed 30% of the rent amount, it is better to opt for the actual regime.

Practical case:

For €10,000 of rent collected, you incurred €5,000 in deductible expenses. The expenses therefore represent 50% of your rental income. In this case:

• By opting for the micro-foncier regime, you will be taxed on the basis of a net property income of €7,000 (€10,000 minus the 30% flat-rate allowance, which is €3,000).
• By opting for the actual expenses regime, you will be taxed on the basis of a net property income of €5,000 (€10,000 minus the 50% actual expenses, which is €5,000).

Taxation on furnished rentals

Whether for seasonal rentals or primary residences, properties rented furnished under the non-professional furnished landlord status (LMNP) fall into the category of industrial and commercial profits (BIC). As with unfurnished properties, you can choose between two tax regimes based on the rental income received: the micro-BIC regime and the actual profit regime (régime réel).

Calculating and declaring taxes for a furnished rental under the micro regime

For whom?

The micro-BIC regime is a simplified system that automatically applies to landlords of furnished properties when their rental income is equal to or less than the ceiling of €72,600. This ceiling includes all amounts received by the landlord from the tenant, meaning rent inclusive of charges.

The amount of deductible expenses is fixed at a flat rate of 50% of the rental revenue collected. This allowance is intended to cover deductible costs such as renovation work, mortgage interest, and property depreciation.

How to declare?

The declaration of rental revenue under the micro regime must be made on form n°2042-C-Pro, in the Non-professional industrial and commercial profits section. The tax authorities will automatically apply the allowance: you must therefore declare all of your revenue without deducting any expenses.

Good to know

Gîtes, bed and breakfasts, and furnished tourist accommodations are subject to specific regulations. They are eligible for the simplified micro-BIC regime when annual revenues do not exceed €176,000, and the flat-rate allowance applied is 71%.

Example of tax calculation for a furnished rental under the micro regime

The ceiling is set for a full year of activity. If the property was rented out partway through the year, the ceiling is adjusted on a pro-rata monthly basis: for 3 months of rental, for example, the ceiling is €18,150, which is (€72,600 / 12) x 3.

A landlord who rented out their property for €1,000 per month including charges would therefore declare €3,000 in revenue: they benefit from the 50% flat-rate allowance and will therefore be taxed on a base of €1,500.

They will have to pay the 17.2% social contributions on this base amount, as well as the income tax rate corresponding to their Marginal Tax Bracket (11%, 30%, 41%, or 45%), as seen in the previous examples.

Calculating and declaring taxes for a furnished rental under the actual regime

For whom?

The actual regime is the mandatory tax regime for landlords of furnished properties whose rental revenue exceeds €72,600 annually. The actual regime can also be chosen by landlords earning less revenue if it proves more advantageous. However, in this case, the commitment to remain in this regime is for 2 years, and the tax authorities must be informed of your choice before February 1st of the year to which the tax will apply.

How to declare?

Taxation under the actual regime is based on the declaration of all actually incurred deductible expenses. It requires filling out several tax forms: the declaration n° 2033 and declarations n°2033-A, B, C, D, and E.

Good to know

The following can be listed as deductible expenses: costs relating to mortgage interest, non-occupant landlord home insurance, the property tax (taxe foncière), fees paid to an accountant, and certain eligible works. The depreciation of the property and its furniture is also deductible.

Example of tax calculation for a furnished rental under the actual regime

For example, imagine a property purchased for €150,000 and furnished for €10,000, where the depreciation can be spread over 20 years for the housing and over 5 years for the furniture. We therefore have:

€7,500 (€150,000 / 20 years) and €2,000 (€10,000 / 5 years) in depreciation, totaling €9,500 that can be deducted each year from the rental revenue.

Deductible expenses can also be applied, for example, €600 for eligible works and €800 for property tax.

If €12,000 in rental revenue was collected during the year, the actual regime will tax the landlord based on this €12,000 minus the €9,500 in depreciation, minus the €600 for deductible works, and minus the €800 in property tax. The taxable amount is thus reduced to only €1,100.

Which regime is more advantageous for a furnished rental?

There are two scenarios:

• If your deductible expenses are less than 50% of your rental revenue and you are eligible for the micro-BIC regime, this regime is highly attractive for its simplicity, which saves you from needing to hire an accountant.
• If your expenses are significant and far exceed 50% of the rent you have collected, the actual regime allows you to deduct them and significantly lower the amount of your taxable rent.

Good to know

The main advantage of the actual regime is that it allows you to deduct the depreciation of the property and its furnishings. However, calculating depreciation requires the expertise of an accountant, whose fees must be factored in. These generally range between €600 and €1,800 per year.

If the tax savings offset the accountant's fees, then the actual regime remains more advantageous. You must also consider that opting for the actual regime commits you for two years.

If the tax savings are unlikely to offset the cost of an accountant's fees, particularly if your expenses are only slightly above 50% of your rental revenue, it is better to opt for the micro-BIC regime: provided, of course, that you meet the eligibility criteria, with total annual collected rent not exceeding €72,600.

Renting unfurnished vs. furnished: what is the best choice from a tax perspective?

Renting out a property generally incurs high taxation, which can surprise uninformed investors. Because the rental of an unfurnished property and the rental of a furnished property are not subject to the same taxation, what is the best choice to minimize your tax burden and make your acquisition profitable?

Several variables must be considered to evaluate the advantages of renting unfurnished or furnished: the attractiveness of the actual regimes depending on your situation, your other sources of income (and therefore your Marginal Tax Bracket), or the possibility of creating a property deficit (déficit foncier) through renovation work. Let's summarize the examples seen above and determine the best choice based on the chosen tax regimes.

Under the simplified tax regime, opt for furnished rentals

The simplified tax regime, meaning the micro regime that allows for a flat-rate allowance instead of deducting actual expenses, is heavily in favor of furnished rentals.

The allowance used to determine the taxable rent amount is automatically applied by the tax authorities in both cases. This allowance is 30% of the rent collected for an unfurnished rental, and 50% of the rent collected for a furnished rental. The savings are considerable, as social contributions and taxes are calculated by applying a percentage to the taxable amounts.

Another advantage in favor of furnished rentals when you qualify for the micro regime is the annual ceiling that allows you to remain under this simplified system: it goes up to €72,600 for a furnished property, compared to only €15,000 for a property rented unfurnished.

Key takeaway

In conclusion, if you opt for a simplified tax regime (micro-foncier or micro-BIC) and have few deductible expenses—specifically no mortgage interest or significant renovation costs—then it will be more advantageous for you to rent out your property furnished, under the LMNP (non-professional furnished landlord) status. For an equivalent rent amount, you will pay less in taxes than if you choose to rent your property unfurnished.

Under the actual regime, opt for furnished rentals if your property income is positive

The actual regime offers very similar tax conditions for both furnished and unfurnished rentals. It involves deducting all allowable expenses from your total annual rent, and the list of these expenses is nearly identical regardless of the rental type: renovation work, property tax, mortgage interest, etc.

However, the actual regime reserves a highly advantageous option for landlords of furnished properties: the ability to deduct, on top of standard deductible expenses, the depreciation of the property and its furniture. Each year, a portion of the property's and furniture's value—corresponding to the estimated depreciation period—can be deducted, often resulting in non-taxable property income for several years.

Conversely, the landlord of an unfurnished property tends to see their taxable property income increase over the years: not only do they miss out on the depreciation deduction, but their deductible mortgage interest also decreases as time goes on.

Key takeaway

Under the actual regime, the deduction of depreciation heavily tips the scales in favor of renting furnished properties. But be careful, there are scenarios where the actual regime can still be more advantageous for an unfurnished rental!

Under the actual regime, opt for unfurnished rentals if you can create a significant property deficit through renovations

The issue of the property deficit (déficit foncier) must also be factored in when comparing the advantages of unfurnished and furnished rentals taxed under the actual regime.

A property deficit refers to a situation where deductible expenses are greater than the rent collected. For example, out of €10,000 in rent collected during the year, the landlord might deduct €9,000 for renovation work, €800 for property tax, and €700 in mortgage interest. Their taxable rent is reduced to 0, but a property deficit of €500 is also created.

In the case of a furnished rental, this deficit cannot be offset against any income other than income generated from furnished rental activities. However, in the case of an unfurnished rental, any property deficit created can be offset against other income: it can be deducted from salaries and other income of the tax household up to a ceiling of €10,700. Any amount exceeding €10,700 can be carried forward and offset against property income for the next 10 years. From this perspective, the taxation of unfurnished rentals is significantly more attractive than furnished rentals.

It should be noted, however, that a property deficit is rarely achieved in unfurnished rentals, since unlike furnished rentals, property depreciation cannot be deducted. The only scenarios where it is possible to create a property deficit—and benefit from offsetting it in an unfurnished rental—are when major renovation works are carried out on the property. Unable to deduct depreciation, the landlord of an unfurnished property can instead deduct many expenses related to the improvement, repair, or maintenance of the residential building or unit.

Key takeaway

Under the actual regime, an unfurnished rental will be much more advantageous than a furnished one in the event of a property deficit, because you are guaranteed to be able to use this deficit, and even use it to reduce your income tax generated by your salaries and other earnings.

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