News World dated November 26, is issued by a Bill transpartisanan (dubbed Ministerial Delegate for Housing) on housing to redirect tourism rentals and secondary residences to main residences, the deficit of which is glaring and undisputed in certain so-called stressed areas.
This proposal consists in removing the tax benefits provided to owners of furnished rentals, especially in tourist residences. The stated goal of the authors of the bill is to “drastically reduce the amount of income” of these furnished apartments by replacing the flat rate reduction of 71% on their rents with a flat rate of 40% on all rents. The future law would also increase the decision-making power of mayors, who could impose additional taxes, limit short-term rentals, refuse the construction of second homes, increase the residence tax, etc.
Reasons for investor preference
The idea of aligning the tax conditions with the rental may seem justified, but it is forgotten that the flat reduction replaces the deduction of costs, which are clearly not the same for short-term rentals of furnished tourist accommodation and empty intended apartments. for main residence. In addition, this tax adjustment does not apply to housing tax collected from seasonal rentals and second homes. The disappearance of this tax from the main settlements was followed de facto property tax increase and housing tax on second homes and furnished accommodation, sole responsibility of owners.
The first task should be to uncover the reasons for investors’ preference to rent furnished apartments or their second home and take them into account before drafting the law.
The usual approach is a first-order reflection: are rents too expensive? We don’t ask why, we limit them. Should we fight global warming? The owner must finance the modernization. Are tax incentives for tourist residences reducing the number of principal residences? We tax and limit the rental period. Are too many second homes being created? New construction is taxed and prohibited.
PUSH tax currently levied on unoccupied flats (TLV) in a tight area to increase rental stock is an example of this approach: it is high (17% of rental value) and has doubled since the second year. Owners who escape this tax in relaxed areas can be caught by the mayor, who can create a so-called “housing tax on unoccupied housing” (THLV). It’s arbitrary power like that garden shed tax available to the mayor.
Finally, it is possible that the accommodation is available without the owner having it the right to lease it, if its energy diagnosis is, for example, G. The owner of the vacant accommodation then has only one solution left to avoid paying TLV or THLV: selling at a price that is of course greatly reduced. It is a pure and simple robbery completely contrary to property rights, a hidden expropriation.
Why the success of AirBnB?
It is necessary to think differently. The question is why AirBnB is so successful.
The financial interest is obvious: it is very profitable even without tax benefits. Rent is free. A 35 m² apartment in Paris costs 90 euros per night via Airbnb (much cheaper than a night in a hotel: popular tourism benefits greatly from this). From ten nights it is 900 euros, more than the maximum rent set by the administration.
Financial security is better ensured: tenants are selected without worry from the criteria placed on empty rentals, they pay a pre-determined rent, they stay for a short period of time and insurance covers any damage.
In fact, the success of Airbnb-style rentals is as much a result of state evictions as the original success of VTC. This is also why the state intervenes.
This is not about AirBnB, but about all currently valid administrative control of traditional housing, which penalizes landlords of accommodation in the main residence. In this sector, the state is everywhere: tenant selection criteria, rent determination, rent regulations, tenant protection, living area, ceiling height, toilet area, etc.
The consequence is obvious: it is the disappearance of rooms for maids and low rents to the detriment of young people. Equally ” heat strainer » are excluded from the rental market. Tenants suffer the consequences of these standards, which they don’t necessarily require: someone might prefer an 8m² room near their workplace to a studio over an hour away by public transport, but we have no choice.
The result of this blindness is the flight of investors who cannot or do not want to pay, the slowdown of construction, the reduction of the number of available housing units. Gradually, social housing replaces private housing.
It is very costly to the community and creates numerous inequalities between tenants: social housing and individual housing assistance are allocated based on the declared family situation; the tenant of the apartment for a period of thirty years pays half the rent of the new tenant; the apartment you live in becomes an acquired right; we do not choose accommodation; tenants can, in certain cases, buy their accommodation at non-market prices. The shortage (often several years of waiting) creates the risk of corruption.
Real estate investment has become unmanageable
Private rentals are accused of being reserved for the rich. Social housing, now 22.4% of the main residences in Paris, is reserved for the poor, the middle class is increasingly relegated to the suburbs. Is it social justice?
In 2018, the government replaced the ISF with the IFI, which taxes only real assets, to channel investment into businesses. Investments in rental properties are therefore taxed the most in France: more than 50% marginal rate for the taxpayer: 30% income tax, 17.2% social security contributions, 8% property tax (rental for one month or more). With IFI we can significantly exceed the 70% rent fee.
Tenants protest the high rent and blame the landlord, but it is the state that is the main beneficiary as it receives more than half. At the same timelegislation continued to “protect” tenants:
- elimination of housing tax on principal residences;
- freezing rents in stressed areas;
- improving standards of comfort and insulation at the expense of owners;
- the justice system is overwhelmed and inefficient…
The result is known: housing construction is in crisis, and finding rental accommodation has been an obstacle in some major cities long before Airbnb. Is the latter responsible for the real estate crisis currently crystallizing, or is it because of this quasi-Soviet regulation?
Real estate investments have become unmanageable and financially risky: they offer no guarantee of the future, neither fiscal nor regulatory, much less if mayors have additional powers as provided for in the bill. Its return after tax is very low. Investing in this sector is therefore a big risk with no reward. No wonder institutional investors left this market long ago.
The only real estate investment that remains relatively interesting to individuals is their primary residence, and again: some elected officials would like to eliminate their capital gains tax exemption and introduce fictitious rent what the owner would get if his apartment was rented out. Of course, it is best to have social housing and receive personalized help with housing. What an achievement! But if homeowners disappear, so does government revenue: who will fund social housing?
The demise of furnished tourist rentals and second homes reduces local economic activity. One less second home means one less housing tax and one less vacationer-consumer family. It is very difficult to find a balance between local workers and tourist consumers. Dirigisme solves immediate visible problems but creates invisible problems in the future (this is Bastiat’s principle: “what we see and what we don’t see”). How could the mayors strike a balance? The only solution seems to be the invisible hand of the market, but the one preferred by public authorities is yakafokon: you have to accommodate people, just make the owners pay.
Where do you start to solve these problems?
The first goal is to make real estate investing profitable without favoring a particular market.
The first measure is simple: tax all rent after deducting expenses (justified or after standard deduction) such as dividends (tax and social security contributions at 30%) and eliminate IFIs. Real estate and chattel gains and losses would be combined with compensation.
The second measure is to guarantee investors the stability of the conditions of their investment: the real estate investment is long-term, the regulations on comfort and insulation standards and taxation must remain the same for the period specified in the deposit. The investor’s commitment must be accompanied by the state’s commitment.
The third measure is to reduce the risk of rent: the creation of courts copied from industrial courts would make it possible to resolve conflicts between owners and tenants much more quickly. These courts would also be responsible for conflicts between owners and local authorities, some of whom abuse their positions of power, pre-emption rights and land reserves, among other things.
Any change of land use (unbuildable becomes buildable and vice versa) should be subject to special taxation on sale: special taxation in case of capital gain (which already is) and compensation in case of capital loss (which is not). A capital gains tax could fund the compensation of capital losses.
Rent freedom can only be a long-term goal, with gradual liberalization as leases renew, tenants change and rental stock increases.
Of course, not all regulations are unnecessary. Those that ensure the safety of the tenants materially (electricity, gas, water, elevator, etc.) are essential. Others are completely redundant, such as comfort standards. It would be easy to make only European safety and insulation standards binding.