This law has been in effect since September 2014. Thanks to it, you receive a tax benefit if you are a French tax resident and have invested in rental property. To receive the benefit, you must meet a number of conditions.
The Pinel mechanism was introduced to address 3 goals that the French government has set itself to solve problems with access to housing:
- Stimulating the creation of new housing in so-called “congested” areas, that is, in areas where the demand for rentals significantly exceeds supply.
- Limit rents in these areas so that the most modest families (foyers) can get decent housing.
- Encourage taxpayers to invest in new real estate to contribute to the development and renewal of areas.
The Pinel advantage
- The maximum tax benefit can be up to €63,000 over 12 years (or €6,000/year).
- Possibility of investing loan funds. Tax benefits and income generated from rental property help repay the bank loan.
- Unlike the Duflot law, Pinel offers the possibility of renting out the purchased property to a family member.
- At the end of the Pinel lease, the investor is not obligated to resell it. He can continue to rent it out, live there, or transfer it to a beneficiary of his choosing (sell it?).
Tax optimization
The main advantage of Pinel is undoubtedly that it allows you to optimize your taxes. The tax credit is calculated depending on the investment amount and the length of the rental obligation of the property (6 or 9 years). The annual reduction rate is 2% from the purchase price:
- 12% tax reduction when renting for a period of at least 6 years;
- 18% tax discount when renting for a period of at least 9 years.
During this period, the investor can choose to extend the commitment period for periods of 3 years. The total lease term in Pinel is limited to 12 years.
Good to know: The annual reduction rate is reduced to 1% per year from the 10th year. Therefore, the maximum tax rebate percentage is 21% for a compulsory lease of more than 12 years.
example: For a property worth €100,000 rented for 12 years, the tax benefits will be as follows:
- 2000 euros per year for 9 years (from 1 to 9 years);
- 1000 euros per year for 3 years (from 10 to 12 years).
Cons of Loi Pinel
Unavailability of housing during the rental period
Although you remain the owner, you will not be able to use your home as you wish for the entire duration of the lease, which ranges from 6 to 12 years.
If your obligation is not met, all tax benefits will be withdrawn.
Limited profitability
The Pinel system is accompanied by rent control. The aim is to improve access to housing for people on average incomes: too high to access social housing and too low to rent privately. Thus, the Pinel Law provides for a rent cap that is approximately 20% lower than the rental market.
Of course, this type of rent control in Pinel is a real benefit for tenants. However, rent caps remain a disadvantage for investors. Landlords in Pinel do not have the right to set rents and are committed to renting their homes at a reasonable price. This inevitably impacts Pinel's ROI.
Limited rental investment
Another disadvantage of purchasing real estate under the Pinel law: the investment limit. Indeed, the calculation of the tax reduction is based on the value of the property within the following limits:
- €5,500 per m² of living space;
- Maximum cost 300,000 euros.
This means that if the purchase price or price per m² exceeds one of these limits, the excess will not be taken into account towards the tax reduction. However, in large cities such as Paris or Lyon, purchase prices easily exceed 5,500 euros/m², especially for smaller areas. In addition, the amount of 300,000 euros is the annual ceiling. Therefore, it is not possible to purchase more than 2 Pinel properties in one tax year.
Territorial restrictions
The difficulty of finding a profitable metropolitan area for investment in Pinel rentals due to geographical restrictions is also a disadvantage. This dispositive is used only in special places. However, these geographic areas often correspond to municipalities where property prices are high. The rent amount often far exceeds the ceiling set by the Pinel system. With a high purchase price and low rent, such an investment is unlikely to be profitable.
Tax cuts cannot be delayed
As we have seen, the tax cuts provided by the Pinel Act are a great benefit. However, to take full advantage of it, you must have enough taxes to pay each year before the property tax exemption.
Indeed, the tax reduction is fixed for the financial year and cannot be carried forward to the next year. Therefore, the investor must be sure that his tax due before the tax exemption exceeds the amount of the tax reduction. Otherwise, the advantage is lost.
Example: You get a tax discount of €2,000 per year thanks to your investment in Pinel Law. This year your pre-exempt tax is €1,500. You won't pay any taxes after the layoff. But the remaining €500 is lost and cannot be carried forward into tax next year.
The main arguments for the Pinel scheme are to be able to benefit from tax reductions over a period of several years, as well as the high demand from tenants for this type of property. However, this device also has disadvantages that an investor must consider, such as income limitation and investment limitation.
However, with a little research, you can find areas that offer good rental income, even under Pinel law. As a rule, these are provincial cities or municipalities in the suburbs of Paris.
Source: https://www.service-public.fr/particuliers/vosdroits/F31151
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