Investment in real estate property: DENORMANDIE system
The "Denormandie" tax incentive scheme aims to encourage individuals to buy properties which need renovation, in an old deteriorated neighborhood to rent these out. It is an extension of the Pinel system, which is already in place.
What is the Denormandie system? Can you benefit from this?
The "DENORMANDIE" system is a rental investment mechanism which enables tax reduction (tax exemption system).
This is made for taxpayers between January 1, 2019 and December 31, 2021, residents in France, to buy a housing which is or has been subject of renovation works defined by decree (and referred to below), or a premises assigned to a use other than the accommodation, which is or has been transformed into housing.
The amount of works, invoiced by a company, must represent at least 25% of the total cost of the operation (purchase + works).
Eligible works: All works, as long as they contribute to improving energy performance under the conditions indicated below.
Date of completion: If the work is carried out by the purchaser, the accommodation must be completed no later than December 31 of the 2nd year, following the acquisition of the accommodation.
Denormandie system: Conditions related to housing
To benefit from the so-called Denormandie tax reduction, the works carried out must:
- either lead to an improvement in the energy performance of the housing of at least 30% (or 20% in collective housing) and allow obtaining the energy label E at least on a DPE (= allowing to achieve conventional primary energy consumption after works of less than 331 kWh / m2 / year);
- either concern energetic improvement performance actions, concerning at least 2 of the 5 following categories (and respect particular technical prescriptions): roof thermal insulation work, thermal insulation work on walls facing the exterior, thermal insulation work on glass walls, installation or replacement work for heating systems, installation or replacement work for domestic hot water production systems; and allow obtaining the energy label E at least on a DPE after works (= allowing to attain a conventional primary energy consumption after works, less than 331 kWh / m2 / year
The justification for compliance with the energy performance requirements, in order to determine the consumption threshold after works and the consumption reduction, is provided through the supply:
- 2 energy performance diagnoses (DPE) which must be carried out by professionals. Documents shall attest reductions in energy consumption before and after the work.
- invoices, other than advance payment invoices, from companies having carried out work, including the place of performance of the work, the nature of this works, as well as the features and performance criteria which is required.
The application of the system presupposes that the accommodation is located in the territories where requirements have been identified, mainly the 222 cities which have signed so-called "Coeur de ville" agreements or in the municipalities which shall implement an operation to revive their territory.
The list of municipalities concerned by the system is set by the decree dated, March 26, 2019 relating to the list of municipalities which qualify tax reduction provided for in 5 ° of B of I, article 199, general code of taxes.
Denormandie system: conditions related to rental
The accommodation must be rented bare (unfurnished) for use as a main accommodation.
Effective date of lease
The accommodation must be rented at the latest, 1 year after the completion of the building, or of its acquisition, whichever is later.
The owner agrees to rent the accommodation for at least six or nine years. The option must be exercised while filing the income statement for the year of the property’s completion or its acquisition, whichever is later. At the end of the initial rental commitment period of six or nine years, the taxpayer may extend it for a period of three years (in the case of an initial rental commitment of 9 years), or two periods of three years (in the case of an initial 6-year commitment), therefore making the duration of the rental commitment and the benefit of the tax reduction, to a maximum of twelve years.
Careful: the breaking-up of property of the real estate, shall question the system.
The rent must not exceed, charges not included, certain limits, identical to those existing for the new Pinel system.
Careful: To take the particularities of the local rental markets into account, the rental limits can be reduced locally, by decree of the regional prefect.
To find out more about rental limits, we encourage you to consult the website of the French National Agency for Housing Information. The link is shown on the Pinel rental investment page, because the Denormandie device is an extension.
Denormandie system: Conditions related to tenant
Denormandie system: Specific reporting requirements
The taxpayer must attach to his yearly income declaration, as the case may be, of the completion of the building or of the works, or of his acquisition, whichever si later, a note summarizing the works which were carried out but also their amount and keep documents available to the Administration, in order to justify the nature of the works and the level of energy performance.
Advantages of the Denormandie system
The tax reduction is calculated on the cost price of not more than two accommodations, retained within the limit of 5,500€ per m² of living space and without being able to exceed the limit of 300,000€ per tax household and per year.
To be noted: The tax reduction granted falls within the overall limits of tax loopholes. The rate of the tax reduction varies depending on the duration of the rental commitment. Therefore, it is 12% for a six-year commitment, 18% for a nine-year commitment and 21% for a twelve-year commitment.
These rates apply for metropolitan France.
The Denormandie system in the overseas departments and communities, offers higher discount factors: 23% for a 6-year rental, 29% for 9 years and 32% over 12 years.
It should be noted: if the tax reduction exceeds the tax due for the taxation year, the balance cannot be deducted from the income tax, for the following years.