Malraux Law
Your Objective
Are you heavily taxed on your income and looking to reduce your tax burden?
The Malraux Law offers a tax reduction equivalent to 22% or 30% of restoration expenses, depending on the status of the selected investment area. Through this law, you make a rental investment as part of a complete renovation of an old building. The quality of the restoration is supervised by an architect from the French Buildings Authority.
Details
This scheme, created in 1962, aims to protect French heritage. The level of tax reduction depends on the project’s location:
- 22% of the restoration expenses for projects located in a Remarkable Heritage Site (SPR) with a Plan for the Valorization of Architecture and Heritage (PVAP) that is either approved or declared to be of public interest.
- 30% of the restoration expenses for projects located in a Remarkable Heritage Site (SPR) with an approved preservation and enhancement plan, a degraded historic district (QAD), or a neighborhood under the “New National Urban Renewal Program” (NPNRU).
These areas are most often located in historic city centers. Regardless of the location, the tax reduction is calculated on a maximum of €400,000 worth of restoration work starting from the date of the building permit until December 31 of the third following year, for a total period of four consecutive years. The calculation of the reduction is capped at €100,000 of restoration work per year. However, you can undertake €400,000 worth of work in the first year, with the annual tax benefit carried over to the following years.
Advantages
- The Malraux scheme is not subject to the standard €10,000 per year tax niche cap.
- The properties eligible under the Malraux Law are often located in the heart of city centers.
- There is no cap on the rent you can charge for your property, and there are no income restrictions for tenants.
- A tax benefit that can reach up to €120,000 over four years.
OptiFi’s Opinion
Supporting historical heritage offers a significant set of tax benefits. However, this scheme should be approached with caution, as illustrated by this investment example: For a total investment of €180,000, benefiting from a 30% deduction, with the following budget allocation:
- Acquisition of a property valued at €72,000
- A budget of €108,000 for restoration work, which will be the basis for calculating the tax benefit.
The investor will receive a tax reduction of €32,400 (30% of €108,000). This amount will then be deducted from their taxable income over the years. This reduction is substantial, BUT such a setup will be highly taxed upon resale, nearly offsetting the tax savings achieved.
The tax authorities calculate capital gains based on the difference between the selling price and the acquisition cost. The acquisition cost will include the property price (excluding restoration costs), plus a standard restoration allowance if the property has been held for more than five years. While the investor has already benefited from a tax reduction on the restoration costs, a flat rate of 15% of the acquisition price is allowed for any potential restoration work during the rental period.
If the property is sold for €180,000 after ten years, you would not have made any profit compared to what you originally spent. Yet, according to the tax authorities, you will have gained: €180,000 – €72,000 – (15% x €72,000) = €97,200, on which you will be taxed!
For a holding period of 10 years, the tax liability is expected to be around €29,600.
From an operation where you were supposed to save €32,400 in income tax, you will end up paying €29,600 upon resale, without having made any financial gain!
In conclusion, while the Malraux investment scheme is often promoted to high-net-worth individuals for its tax benefits, it is rarely advantageous in practice. OptiFi once again highlights that the Malraux investment should be approached with great caution, as evidenced by the warning issued by the AMF (Financial Markets Authority) in 2015 regarding the end-of-life tax implications of Malraux SCPI investments.