Real estate leasing: should you stay with IR or switch to IS before exercising the option?

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Real estate leasing is a method of financing that allows the use of a building for a fixed period of time, in exchange for the payment of rents, with the option of becoming its owner at the end of the contract by exercising a purchase option, often fixed at a price lower than the real value of the property.

This mechanism is frequently used in a wealth context, in particular when a civil real estate company subject to income tax operates the building during the rental phase. It offers apparent flexibility, but the taxation applicable when the option is exercised is often underestimated.

A structuring question then arises: should you stay on income tax until the option is withdrawn, or should you first opt for corporate tax in order to control the fiscal cost of the operation?

The tax regime of real estate leasing in SCI at income tax

During the lease term, an SCI under the partnership regime can operate the leased building and collect the corresponding rents. This income is taxed directly Between theIn the hands of the partners, in proportion to their rights in society.

One of the attractions of leasing is the Deductibility of rent paid by the SCI. These rents reduce the taxable result, providing an immediate tax advantage compared to an acquisition in full ownership.

However, this advantage is limited. The portion of the rents corresponding to the land is not deductible, as the land is not depreciable. A breakdown between land and buildings is therefore necessary, which mechanically reduces the fiscal interest of the system.

The exercise of the purchase option under the income tax regime

When the option is exercised, the tax law provides for a catch-up mechanism intended to neutralize the advantage obtained during the rental phase. Part of the rent previously deducted is reintegrated into the result of the financial year during which the option is exercised.

Beyond this reinstatement, the lifting of the option leads to the establishment of a professional added value immediate. From a fiscal point of view, the building is considered to be outside of the professional heritage to enter into the private assets of the company.

This added value is taxed directly between The hands of the partners to the progressive income tax scale, plus social security contributions. It occurs independently of any resale and without creating cash flow, which can generate a significant financial constraint.

The corporate tax option before the option is exercised

In order to avoid this immediate taxation, the option for corporate tax before the exercise of the purchase option may be a strategic alternative.

When the SCI is subject to corporate income tax, the building is included in the assets of the balance sheet for its acquisition cost. The reintegration provided for in the texts remains applicable, but it is limited to the fraction of the rents assimilated to the depreciation of the building.

These amounts are then taxed to corporate tax at common law rates. Taxation is disconnected from the real market value of the building and generally remains more bearable, especially in the absence of resale.

As of the acquisition, the building becomes depreciable, excluding the value of the land. The amortization applied will reduce future results, while preparing the taxation applicable in the event of a subsequent sale.

Tax consequences in case of subsequent resale

If the building is sold while the SCI is subject to income tax, the capital gain is qualified as professional added value. It is calculated by difference between The transfer price and Net book value, reduced by amortizations practised.

This capital gain is taxed at corporate tax, without benefiting from the allowances for duration of detention applicable to individuals. Additional taxation may be added in the event of distribution of funds to partners.

Conversely, under the income tax system, resale is subject to the rules of Real estate gains for individuals, with allowances for length of detention that may lead, in the long term, to total exemption.

Arbitrating between IR and IS: a decision to be anticipated

Exemption of the real estate leasing option may, under the income tax regime, result in immediate taxation very heavy, without cash generation. The corporate tax option often makes it possible to smooth out and postpone this burden, at the cost of heavier taxation upon resale.

The choice of tax regime must be assessed on a case-by-case basis, taking into account the latent value of the building, the horizon of ownership, the capitalization or distribution strategy and the asset objectives of the partners.

We offer to assist you in the analysis of these parameters, the arbitration between the possible options and the securing of the implementation of this operation within a controlled legal and fiscal framework.