Definition of LMNP
The "Non-Professional Furnished Rental", as its name indicates, is a tax regime offered to landlords who choose to provide furniture to the tenant as part of their rental investment. It is contrasted with "unfurnished" rental (also called "bare" rental). Discover here all the tax advantages of the LMNP status.
The mandatory furniture
Of course, as with any rental, you must provide your tenant with decent housing (for example: an area of more than 9m2, at least 2.20m in ceiling height, a heating system, access to drinking water and sanitation, lighting, and electrical standards). But that's not all. To qualify for the status of “Furnished Lessor,” you must provide, at a minimum, certain furniture and equipment. To learn more about the obligations as a non-professional furnished lessor, see our dedicated article in the LMNP landlord's guide.
Higher rents
Given the expenses you save your tenant (purchase of furniture, moving...) by renting out a furnished property, it is common to apply a higher rent than for an unfurnished rental. This discrepancy varies according to demand, the quality of the furniture, the non-mandatory furniture added, and the legal constraints on rents (such as rent control or rent caps). However, it is often considered more profitable to rent furnished rather than unfurnished, despite initially higher costs.
A favorable tax regime: depreciation and the actual regime
The Furnished Rental has major advantages in terms of taxation, especially when compared to empty rental. By default, furnished rental falls under the LMNP (Non-Professional) regime. You then have the choice between 2 deduction regimes: the flat rate (“micro-BIC”) or the actual expenses. By opting for the former, the flat rate for expenses is 50% (vs 30% for empty rental). In other words, you will only be taxed on 50% of the rents received vs 70% for empty rental.
The second (the actual regime) has the advantage of allowing you, when declaring your income, to declare your expenses at actual (as with empty rental), but also, and above all, to deduct from your rents the depreciations. The principle is as follows: in accounting, you can smooth out the depreciation of the asset value (in this case, your investment) over several years. Your accountant will treat the object of your investment (the property, individual or collective works, agency and notary fees…) as losing value each year due to the use by a tenant, and will allocate this depreciation to your rental income. For example, furniture can depreciate over 5 years. Interior work over 10 to 15 years. Roof work over 30 years. Structural work over 80 years!
Agency fees (including Beanstock fees!) and notary fees can also be depreciated over a duration equal to that of your property (about 20 years). With all these deductions, it is not only unlikely that you will have a positive net result, but you will probably also have deficits. Warning: the depreciation of the property cannot create or increase a deficit. Only actual expenses will create a deficit, which you can carry over to the following years within the limit of 10 years.
If a part of the property's depreciation is not used (since it cannot create or increase the deficit), it can be carried over indefinitely. Besides the depreciations, you can deduct: loan interest, borrower insurance and other insurances (especially PNO or unpaid rent), agency fees for renting out or managing your property, the replacement of small appliances (for larger items, landlords often choose to depreciate them), property tax and CFE, and ongoing condominium charges (excluding work).
Capital gains tax: the icing on the cake
And the most incredible thing about all this is that the future capital gain you can achieve in the future will not take into account the accounting depreciation that you will have deducted throughout the furnished rental. If you buy a property for 100, depreciate 40, and then sell it for 200, accounting theory would suggest that your property is worth 60 at the time of resale and that you have thus realized a capital gain of (200-60) = 140. However, here it is indeed the initial value (100) that will be used for the calculation of the capital gains! So you will have benefited from the depreciation to significantly reduce your tax, without increasing the future capital gains tax at the time of resale!
A more demanding operational management
Among the drawbacks of furnished rentals compared to unfurnished ones, there is notably a greater need for management. Indeed, furniture wears out with use and will require frequent replacement/repair. With a bit of luck, your tenants will take this task upon themselves, but some damage will still occur over time. Moreover, furnished rentals are much more flexible than unfurnished ones. The lease you sign lasts a maximum of 1 year (automatically renewable at the end of each year) vs 3 years for unfurnished rentals. The notice period for departure is only 1 month. And as he/she did not have to furnish the entire apartment and will not have to move the furniture, your tenant will more easily change housing as soon as the opportunity arises.
Make sure there is a request
Finally, keep in mind that furnished rentals must meet a demand. The target tenants for a furnished rental generally fall within a short time frame. You will therefore find it easier to rent to a student than to a family. In certain cities in France, renting furnished may not make sense in relation to the demand.
LMP vs LMNP
We have been talking since the beginning of this article about LMNP: Non-Professional Furnished Rental. However, if your revenue from furnished rentals exceeds (1) €23,000 annually and (2) the rest of your household income, you will automatically switch to the status of Professional Furnished Rental. This status, like any tax regime, has advantages and disadvantages compared to LMNP.
Advantages
Your deficits can be deducted from your global income (thus reducing your income tax), capital gains are subject to the professional capital gains regime, and therefore benefit from an exemption: partial if more than 5 years of operation and revenue between €90,000 and €126,000, total if more than 5 years of operation and revenue below €90,000. As a reminder, in LMNP, the capital gains regime is that of individuals, thus total exemption: after 22 years of holding for income tax, and after 30 years for social contributions.
Disadvantages
The main disadvantage (but it can be very important) is that LMP is subject to professional social charges. This allows the lessor to benefit from health coverage and an old-age insurance. But these charges are very high. The net professional income is taxed at a rate of 20.15% to 43.20%. Similarly, short-term capital gains (=depreciations) realized by contributors to the social regime for the self-employed (RSI) are subject to RSI social contributions even though these capital gains are exempt from taxes. That is why it is important to maintain this status for at least 5 years to benefit from the tax advantage (partial or total exemption) on capital gains in LMP.
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