Understanding the Doubled Land Deficit Chargeable to Overall Income for Energy Renovation Work on Rental Properties

To encourage lessors to renovate their excessively energy-intensive homes, the amending finance law voted at the end of 2022 temporarily raises the limit for charging land deficits to overall income, to bring it from €10,700 to €21,400 per year. The system concerns all owners who, between 2023 and 2025, carry out energy renovation work allowing a rented accommodation to move from an energy class E, F or G to an energy class A, B, C or D.

ENERGY RENOVATION WORKS

The work to be carried out must make it possible to improve the overall energy performance of the dwellings. This includes thermal insulation work, work to install, regulate and replace heating, ventilation or hot water production systems, and work to install equipment using an energy source renewable. On the other hand, work to rehabilitate non-collective sanitation systems and work to install a boiler with very high energy performance are excluded.

The expenses giving rise to the right to the doubling of the property deficit chargeable to the total income are all those incurred for the performance of energy saving work: price of equipment and materials, cost of labour, cost of removal of existing equipment, expenses for project management, technical studies and “contractor” insurance. Lessors can also take into account the cost of the inseparable works necessary for the proper execution of the energy performance improvement works.

Good to know : only taxpayers who rent out unfurnished accommodation are affected by this system. Furnished lessors, whose rents are taxable as commercial profits and not as property income, cannot benefit from it.

ORDINARY DEFICIT AND WORKS DEFICIT

Renovating a home from top to bottom is very expensive, especially since the price of materials has skyrocketed. The doubling of the land deficit attributable to overall income therefore seems welcome to reduce the bill. Lessors who undertake work will benefit from tax reductions which will partly offset their expenses.

But beware, within the annual allocation limit of €21,400, a distinction must be made between two distinct land deficits: on the one hand, the deficit created by the current charges attached to the leased property (management costs, insurance, maintenance, repair and improvement work, co-ownership charges, etc.); on the other hand, the specific deficit created by the expenses linked to the energy renovation work of the property. The first remains deductible from overall income up to €10,700 per year (as usual!), and the second is deductible up to an additional €10,700 (this is new!).

As a result, landlords whose rentals are beneficiaries (rents exceed current charges) will only be able to deduct €10,700 from their overall income if they carry out energy renovation work generating a land deficit. Only lessors whose rentals are in deficit before the works (current charges exceed the rents) will be able to benefit from the charge limit increased to €21,400. In other words, the device is aimed at owners whose homes already bring in less than they cost each year, and who are ready to incur additional renovation expenses that will further increase their losses. Notice to amateurs!

Good to know : the housing concerned by the energy renovation must be the subject of two energy performance diagnostics (DPE). The first, carried out before the works, must establish that the property is classified E, F or G, and the second, carried out after the works, must establish that it has reached class A, B, C or D.

CHARGEABLE DEFICIT AND CARRY-FORWARD DEFICIT

The imputation of a property deficit on the overall income makes it possible to obtain a reduction in tax proportional to its marginal rate of taxation. For example, a lessor taxed at 30% who charges €10,700 of land deficit to his other taxable income sees his taxes drop by €3,210. And inevitably, with a doubled attributable deficit, his taxes will drop twice as much (– €6,420, or 30% of €21,400).

The problem is that the fraction of the land deficits which exceeds the limit of imputation on the total income can be carried over to the land income collected during the following 10 years. However, carry-forward deficits make it possible to obtain additional reductions in income tax, but also reductions in social security contributions. And inevitably, with a doubled chargeable deficit, the deficit that can be carried over to property income for the following years is lower, which reduces tax savings and subsequent social contributions.

In the end, the system is disadvantageous for lessors, because the tax reductions obtained with the deficit increased to €21,400 will be lower than those obtained with an ordinary deficit of €10,700. For example, a lessor taxed at 30% with a land deficit of €30,000 will save a total of €10,479 in taxes and social security contributions with the system, compared to €12,320 without. Conclusion: to encourage lessors to renovate their properties in poor condition, the public authorities have designed a measure that will make them pay more taxes than in normal times.