Capital Gain on Secondary Residence: Everything You Need to Know

Selling a secondary residence can be financially advantageous, especially due to the real estate capital gain, which is the difference between the purchase price and the selling price of the property. However, this capital gain is often taxable, requiring a deep understanding of the current tax regulations. How to precisely calculate this capital gain? What deductions and exemptions can apply? Here is what every owner needs to know to optimize their taxation when selling a secondary residence.

Principle of Real Estate Capital Gain

The real estate capital gain is the difference between the selling price of a property and its initial purchase price. This value can be increased by renovation costs or improvements made to the property over the years. For a primary residence, this capital gain is often non-taxable, but for secondary residences, the rules differ.

When it comes to a secondary residence, the capital gain becomes taxable, but certain specifics must be taken into account. The calculation of this capital gain is subject to various deductions based on the duration of ownership, which can significantly influence the tax owed. The tax regime applied to the sale of a secondary residence is designed to encourage long-term ownership and minimize the fiscal impacts for those investing in real estate over a long period.

To anticipate the fiscal implications of selling your secondary residence, it is recommended to proceed with a real estate appraisal. This step not only allows you to prepare financially but also to strategically plan the timing of the sale to maximize profits.

Calculating Real Estate Capital Gain

Calculating the real estate capital gain for a secondary residence involves subtracting the purchase price of the property from the price at which it was sold. However, this gross calculation can be adjusted to reflect the actual expenses incurred by the seller, thus reducing the taxation on this capital gain.

  • Gross Capital Gain: The first step is to deduct the purchase price of the property, including acquisition costs such as transfer duties and notary fees, from the selling price.
  • Increase in Acquisition Price: The seller can increase the acquisition price with actual costs such as renovation or improvement works they financed, or opt for a flat-rate increase which is often 7.5% for properties held for less than five years and can go up to 15% for those held longer.
  • Calculating Taxable Capital Gain: After adjusting the purchase price with these increases, this adjusted amount is subtracted from the selling price to obtain the taxable capital gain. This amount can then be reduced by deductions for the duration of ownership, which increase with the number of years the property has been held.

Applicable Tax Rates and Deductions

Overall Tax Rate

The real estate capital gain on secondary residences is generally taxed at an overall rate of 36.2%. This rate includes 19% income tax and 17.2% social contributions. These rates are applied to the net capital gain, after considering deductions for the duration of ownership.

Deductions for Income Tax

  • From 0 to 5 years of ownership: No deduction is applied, meaning the entire capital gain is taxable.
  • From 6 to 21 years of ownership: The deduction increases gradually each year, starting at 6% for the sixth year and increasing by 6% each subsequent year, reaching 96% in the twenty-first year.
  • 22 years and over: The capital gain is 100% exempt from income tax after 22 years of ownership.

Deductions for Social Contributions

  • Up to 5 years: No deduction is applied for social contributions.
  • From 6 to 21 years: The deduction for social contributions starts at a lower rate, 1.65% for the sixth year, gradually increasing each subsequent year, reaching 26.40% in the twenty-first year.
  • 22 to 29 years: The deduction continues to increase more significantly, rising to 28% for the twenty-second year and reaching 91% in the twenty-ninth year.
  • 30 years and over: After 30 years of ownership, the capital gain is fully exempt from social contributions.

Cases of Total Exemption

A total exemption from the capital gain is applied if:

  • The owner has not been a principal resident during the 4 years preceding the sale and reinvests the total sale amount into their principal residence within the following 4 years.
  • The sale price does not exceed 15,000 euros, regardless of the duration of ownership.
  • The seller is retired or disabled and their reference taxable income does not exceed the established threshold.

If you are considering selling and reinvesting in real estate, feel free to browse our Paris real estate listings and contact one of our agencies.