Rental property deficit: how does it work?

The rental property deficit (déficit foncier) scheme applies to owners of rental properties. Its purpose is to let you reduce your taxable income by deducting up to €10,700 per year from your taxable income, with the remainder carried forward against your property income for the following ten years. For this to be possible, your expenses must exceed your rental income. You can also combine it with other schemes to optimize the effects of the rental property deficit.

What is a rental property deficit?

The rental property deficit scheme was introduced to encourage the modernization of France’s housing stock: by giving taxpayers the opportunity to reduce their taxes, landlords are more inclined to invest, especially since renovation increases the value of their property, allowing them to raise rent or sell the property for a higher price later on.

The rental property deficit is used in connection with a rental investment for which you carry out works. If your expenses exceed the income generated by rent collected, you can deduct this deficit from your overall income. This scheme only works if you rent out your property unfurnished and your income falls under the actual expenses tax regime (régime réel).

Additionally, the maximum amount that can be deducted is €10,700 per year. However, if you exceed this amount, you simply carry the excess forward to the following year, which is possible for 6 years for overall income and 10 years for property income.

Thanks to the rental property deficit, the tax saving comes from the reduction of the taxable income base subject to the personal income tax scale (IRPP).

What is an unfurnished rental?

To set up the rental property deficit scheme, your rental must be unfurnished. This means your property must be rented without any furniture or equipment other than what is strictly necessary. The only equipment provided in an unfurnished rental is sanitary fittings, a bathroom, and kitchen fixtures, such as a sink.

Additionally, to benefit from this tax advantage, the works must be carried out by professionals, and you must commit to renting out the property for the 3 years following the last year the deficit is applied. Deductible expenses must relate to maintenance, repair, improvement, or renovation works.

Be careful: expenses related to construction or the extension of your property do not fall within the scope of the rental property deficit.

The benefits of the rental property deficit

Any unfurnished rental used for housing purposes is eligible for this scheme, regardless of location. The tenant may occupy it as a primary or secondary residence. Furthermore, since the rental property deficit is not considered a tax loophole (niche fiscale), it is not subject to the cap applied to such loopholes. You can therefore combine it with other schemes, such as the Pinel law.

The only limits are:

• The deduction against overall income is capped at €10,700;
• The deficit can be carried forward for a maximum of 10 years.

A rental commitment of just 3 years

The 3-year commitment period is an advantage compared to other tax schemes, which have stricter requirements.

Which expenses are deductible from the rental property deficit?

Deductible expenses under the rental property deficit scheme are not limited to works alone, even though these make up the main category.

Expenses related to works

The only works taken into account when calculating the rental property deficit are expenses related to repair, maintenance, and improvement of the property. Construction, reconstruction, and extension works are excluded.

Repair and maintenance expenses are intended to maintain or restore a property to good condition. The initial layout and fittings cannot be altered. The goal is to allow normal use by the tenant.

Improvement expenses can under no circumstances alter the structure of the building. They must, however, provide better comfort and add new fittings in line with modern living standards.

Lastly, expenses excluded from the scheme concern the creation of new premises that alter the building’s structural framework and increase the volume or living area of the current property. As a result, you also cannot deduct works that are inseparable from extension projects. For example, if you add a floor to your building or convert an attic, the roof repair cannot be counted under the rental property deficit scheme.

Non-financial expenses related to operating the property

The following list covers non-financial expenses related to operating the property that you can include under the rental property deficit scheme:

• real estate agency fees if you outsource the management of your rental;
• management fees for the time you spend managing your rental yourself;
• insurance premiums: fire, water damage, unpaid rent, rental vacancy, etc.;
• co-ownership charges: maintenance, operating and equipment costs for common areas of the building, works in common areas, etc.;
• taxes related to the rented property: property tax, equipment tax, etc.;
• expenses paid on behalf of tenants that ultimately remain the landlord’s responsibility;
• procedural costs for settling disputes related to the rented property: lawyer’s fees, bailiff’s fees, notary’s fees, etc.

Financial expenses related to loan interest

Financial expenses related to loan interest are the ancillary costs and interest on loans taken out both for the purchase of the property and for the works:

• death and disability insurance;
• unemployment insurance;
• application fees, etc.

Be careful, however, to properly allocate these financial expenses: they are indeed deductible up to the limit of your property income, but they can never contribute to creating a rental property deficit deductible against overall income. They can therefore only offset taxable property income.

How do you calculate your rental property deficit?

The calculation of the rental property deficit is carried out in two steps.

1 – Calculating the deficit related to financial expenses

To calculate the deficit related to your financial expenses, you must subtract these expenses from your rental income.

If your balance is negative, the deficit from your financial expenses can be carried forward against property income for the following 10 years.

If your balance is positive, move on to the second step.

2 – Calculating the deficit related to other expenses

You must then calculate the portion of the deficit resulting from other expenses that can be deducted from overall income, up to a limit of €10,700.

If the result of step 1 is positive, deduct the amount of non-financial expenses from this result.

If the result is positive, this means there is no rental property deficit.

If the result is negative, the resulting rental property deficit is deductible from overall income, capped at €10,700 per year. The excess can be carried forward against income for the following 10 years.

How do you declare your rental property deficit?

In the event of a rental property deficit, it appears on line 263 of your tax return. This amount is deducted from the household’s total gross income, still within the limit of €10,700 per year.

You must report this rental property deficit on your 2042 tax return in box 4BB or 4BC. Don’t forget that the following year (N + 1), you must report in box 4BD any deficit not offset that year (N), which can be carried forward for the next 10 years. These deficits can then only be offset against property income.

It is possible that your rental property deficit exceeds your household’s total income. In that case, the overall deficit will be carried forward over the following 6 years. Remember that to continue benefiting from the carry-forward of the rental property deficit, you must keep renting out your property for the 3 years following that deficit.

The tightening of rental conditions related to the energy performance of properties is forcing many landlords to carry out renovation or maintenance works. If this applies to you, think carefully about the improvements you undertake in order to benefit from the rental property deficit scheme. Also look into state aid, as well as regional aid, to help you plan your budget.