'LMNP' is the French acronym for the 'non-professional' leasing of furnished property, which enables the straight-line depreciation of an entire property investment (excluding land) over a period of up to 30 years. Housing units must be leased furnished and furniture can be depreciated over five to seven years. Not only does this form of real estate investment build up wealth over the years, the deduction of depreciation reduces taxable income. Expenses for maintenance, repairs, property management and interest on loans can also be deducted.
As a result, the depreciation and other deductions allowed under the LMNP regime generate excess depreciation that can be carried forward and applied against future income. The number of years during which depreciation can be carried forward depends on the type of loan used and on the amount self-financing, which of course reduces deductible loan interest.
The deduction of expenses and depreciation considerably reduces the tax owed on rental income, since depreciation not used in past years can be charged against current rental income, thus making the LMNP investment revenue in effect tax exempt.
Leasing furnished rooms or apartments on a regular basis is a business activity. For the purpose of income taxes, income from this leasing activity is considered to be 'industrial and commercial income' (ICI) and not 'rental income'. This type of leasing may be conducted by a sole proprietorship (EURL) or a family-type SARL company that is not subject to corporate income tax, and by companies that are subject to corporate income tax, such as SA and standard SARL firms. The tenant must be provided with furniture and fixtures that are appropriate for normal residential use.
Unlike rental income, which is determined using a simplified 'revenue expenditures' accounting procedure, ICI is calculated using a standard business accounting procedure that involves subtracting payables from receivables and keeping track of income sources (i.e. residential leasing services) and the 'real' expenses actually incurred.
Whether the applicable ICI tax regime is the simplified 'micro-regime' or the standard 'real regime' depends on the same standard taxation criteria for both professional and non-professional lessors.
If the lessor is an individual with gross annual leasing income of no more than €32,100, the default regime is the simplified micro-ICI and the lessor will be exempt from VAT. In this case, the net income will be the gross income minus a 50% lump-sum deduction for expenses (at least €305) applied directly by tax authorities on the 2042 C personal income tax return. Actual expenses cannot be deducted.
The lessor can also opt for the 'standard real' tax regime.
This option must be selected before 1 February of the first year for which the lessor wants the new regime to apply. This option is valid and irrevocable for two years, unless there is a change in the business activity. It is automatically renewed for a two-year period.
The lessor must determine his or her net taxable income by deducting all expenses from revenue.
Taxpayers may select between the simplified tax regime and the 'standard real' tax regime. If the lessor's rental income is between €32,900 and €763,000, the lessor will be taxed under the simplified real regime and must file a standard professional tax return (using forms 2033 and 2031). Any income beyond this will be subject to the standard real regime that normally applies.
Is considered to be a non-professional lessor of unfurnished premises anyone who obtains from this activity an annual income of no more than €23,000 including tax (or the pro rata equivalent if the activity began and ended the same year), for whom this income is less than all other professional income, and who is not registered in the trade register as a professional lessor.
If the leasing activity is conducted by a company, the €23,000 does not apply to the company but to the shareholder's share of the company's profit.
Non-professional lessors of furnished premises can only deduct a deficit from income obtained from the non-professional leasing of furnished premises and over the next 10 years. This restriction does not apply to taxpayers under the micro-ICI regime, which does not recognise deficits.
Premises that are leased unfurnished, furnished or equipped to operators of hotel-type residential buildings are subject to VAT and taxpayers can accordingly recover VAT paid on their investment and on leasing expenses.
Any capital gain on the sale of an LMNP apartment is subject to the normal capital gains tax that applies to personal income.
The housing units of non-professional lessors of furnished premises are included in the French wealth tax (ISF) assessment base.