A more coherent approach to
housing taxation
Summary
December 2023
Housing taxation is a complex mix of taxes and tax
incentives, inherited from a long history and incomplete integration
into public housing policy.
Representing revenue of around €92 billion in 2022, or around
3.5% of gross domestic product (GDP) according to the definition
used in this report, it is currently facing unprecedented challenges
linked to the cyclical difficulties of the property market and, more
structurally, to the energy and ecological transition and the growing
inequality of wealth in France.
For these reasons, the CPO (
Conseil des Prélèvements
Obligatoires
- French Council of Mandatory Levies) has chosen for
the first time to analyse housing taxation by looking at its coherence
and effectiveness. At the end of his analysis, it concludes that this
sectoral tax system is ill-
prepared for today’s challenges and needs
to become more coherent by striking a better balance between
incentive schemes and a broader logic of neutrality.
Housing
taxation
is
disconnected
from
the
economic value of property.
Taxes on housing are higher as a proportion of GDP than in
most other developed countries, which is less a reflection of a tax
structure that is unfavourable to the sector than of the particularly
high level of mandatory taxation in France.
Breakdown of tax levies and their yield by housing life cycle (2022)
FOR A MORE COHERENT HOUSING TAX SYSTEM
3
Taxation affects every stage in the life cycle of housing:
construction, acquisition, renovation, ownership, letting and finally
sale. According to this approach, the tax burden on housing amounts
to 3.5% of GDP and 7.6% of compulsory levies. However, its
revenue
is concentrated in the acquisition phase
, due to the
significant weight of transfer duties,
and the holding phase
, with
the property tax.
The reform of the residence tax (2018-2022), which has now
been abolished for main residences, has reduced the share of revenue
accruing to local authorities and reduced their power to set rates. Half
of the tax resources of local authorities, however, continue to come
from housing taxes.
Breakdown of housing levies by controlling authority in 2018 and
2021
Still, this tax represents only a small proportion of the cost
of housing and falls mainly on homeowners. However, the
affordability ratio, i.e. the proportion of income spent on housing,
remains higher for tenants and first-time buyers than for
homeowners.
Above all, in the homeowner category, as shown by the
work carried out by INSEE for the CPO as part of this report,
property tax is regressive, mainly due to the effects of an archaic tax
base that undervalues property in the most affluent municipalities.
4
CONSEIL DES PRÉLÈVEMENTS OBLIGATOIRES
Share of property tax in the income of taxable households in the
Paris region, by place of residence (2017)
Note for the reader: Property tax paid by households liable for this tax and
living in Paris represents on average less than 1.5% of their disposable
income. This share is over 2.5% in most of Seine-Saint-Denis
Source: O. Meslin (Insee, 2023)
The difficulty of obtaining solid and exhaustive data on
housing and its taxation weakens the prospects for reform. Necessary
changes, such as the revision of cadastral rental values, which form
the basis of property tax, are regularly postponed because of the
technical difficulties and the high redistributive stakes involved, but
at the cost of a now considerable divergence between property
taxation and households’ ability to pay.
The revision of the property tax base is a major reform that
should be carried out using a methodology that establishes a direct
link with the market rental value or the market value of housing,
enabling regular updating at a lower cost to the administration.
Average share by IRIS
Non significant
Non distributable data
FOR A MORE COHERENT HOUSING TAX SYSTEM
5
The tax system for housing, despite costly
incentives, makes the market more rigid and is not
adapted to the new environmental challenges facing
properties
Housing taxation is the result of a slow historical construction
dating back at least to the French Revolution. It became more
complex in the second half of the 20
th
century with the addition of
numerous (70 in 2022) and costly (€15.5bn in 2022) tax
expenditures, which are supposed to reflect the desire to use the tax
system as a lever for housing policy. At the very least, they should
be limited in time and regularly assessed.
While the effects of taxation on the housing market appear
to be limited overall compared with those of the economic climate or
interest rates, some measures can help to make prices more rigid and
slow down the necessary adjustments in the event of a credit crunch.
House price index (new and existing)
For example, the effects of the “zero
-
rate loan” on
household solvency are uncertain, and studies of a similar scheme in
the United States have even concluded that it reduces access to home
ownership. Similarly, the inflationary effect of certain tax incentives
for rental investment has been demonstrated.
A ground-breaking study carried out for this report by the
Institut des Politiques Publiques (IPP) also shows that the abolition
of the residence tax on main residences has been partly passed on to
property prices and rents, albeit to a limited extent.
6
CONSEIL DES PRÉLÈVEMENTS OBLIGATOIRES
Average price/m
2
and average rent/m
2
Source: Bach, Bozio, Dutronc-Postel, Fize, Guillouzic, Malgouyres
(IPP, 2023)
The effects of housing taxation on the new challenges facing
the built environment (“zero net artificialisation”, energy renovation)
are still poorly taken into account.
The CPO notes that certain tax measures could be used to
limit soil artificialisation, such as the tax on bare land made
buildable, provided that the system of deductions for length of
ownership is reviewed, and the tax on vacant dwellings, which would
be extended to all areas except those in decline.
Effective rate of tax on undeveloped land made buildable,
depending on length of ownership
Average rent (in €/m2)
Land purchased in 1990
Effective rate of capital gains tax
Year of first transfer after classification as building land on 1 January 2020
FOR A MORE COHERENT HOUSING TAX SYSTEM
7
Similarly, measures to make demand more solvent (zero-
interest loans) may be attractive in a context of rising interest rates,
but should be geared towards the acquisition and renovation of older
homes, which allow a form of land sobriety.
On the other hand, using the tax system for energy
renovation does not make it possible to meet the challenges of
targeting and efficiency, so an alignment of the reduced VAT rate of
5.5% with the intermediate rate of 10% could be sought, provided
that the gain from these reforms is redeployed on direct budgetary
aid.
Breakdown of housing stock by energy performance rating (EPR)
and income quintile (Q) in 2022
EPR A
EPR B
EPR C
EPR D
EPR E
EPR F
EPR G
Q1
1,0%
2,5%
23,5%
32,2%
23,0%
10,8%
7,1%
Q2
1,4%
2,9%
23,6%
32,1%
22,2%
10,7%
6,9%
Q3
1,9%
3,4%
23,6%
32,4%
21,6%
10,5%
6,6%
Q4
2,2%
3,8%
24,1%
32,8%
21,0%
10,0%
6,2%
Q5
2,0%
3,8%
24,4%
33,2%
21,0%
9,9%
5,7%
No
answer
1,2%
2,3%
19,5%
30,7%
24,4%
12,0%
9,8%
Source: Minister for Environmental Transition and Territorial Cohesion
The overall rationale behind any reform of housing
taxation is to rebalance towards greater neutrality.
First of all, the aim is to tax ownership more than acquisition,
particularly in view of the inefficient economic effects of property
transfer duties, which are higher in France than in other European
countries. This general approach implies, on the one hand,
considering a switch from transfer duties to property tax, without any
loss for local authorities, and on the other hand, undertaking a
detailed review of the property tax base, which is clearly inconsistent
with local economic realities and has regressive effects on property
owners.
8
CONSEIL DES PRÉLÈVEMENTS OBLIGATOIRES
Level of property transfer duties (2021, in GDP points)
Source: OECD and European Commission
It is also necessary to treat comparable situations in the same
way, both in time and space. Over time, the tax advantages of capital
gains on property linked to the length-of-ownership allowance fuel
the phenomenon of property or land retention, which could be
corrected by taking account of monetary erosion and building
improvement work.
In terms of space, the historic distinction, unique in the world,
between unfurnished and furnished letting should be called into
question, firstly by abolishing the favourable conditions for
classified furnished tourist accommodations, and then by gradually
unifying tax law around two regimes, “
microfoncier
” (below
€15,000) and “
réel
” (above).
❖
Faced with the new challenges of the built environment in
France, the tax system for housing is still poorly adapted to local
economic realities and to the traditional and new objectives of public
housing policy. Ensuring greater coherence therefore means phasing
out inefficient tax systems and achieving greater tax neutrality.
FOR A MORE COHERENT HOUSING TAX SYSTEM
9
Assuming that the various recommendations set out in this
report are implemented, which are grouped around three main
orientations (making tax measures consistent with the economic
value of housing; giving preference to targeted budgetary aid as a
substitute for tax incentives in order to meet the new challenges
facing the built environment; strengthening the neutrality of housing
taxation in order to promote the resilience of the housing market) and
reasoning on the basis of a constant budgetary yield, it is possible to
represent the financial implications of housing taxation. Currently
based on the two pillars of ownership and acquisition, this tax would
eventually be refocused on ownership, allowing it to be spread more
evenly over the life cycle of the property.
Financial implications of the proposed housing tax reform
The share of acquisition would be reduced, due to the
reduction
–
or even elimination
–
of property transfer duties, while
the share of ownership would be increased, due to the revision of the
tax base and the increase in property tax, and to a lesser extent the
share of disposal (limitation of tax benefits on property capital
gains),
rental
and
renovation
(elimination
of
certain
tax
expenditures).
Representing a third of housing tax revenue under the current
system, property ownership would account for half under the target
system. The diagram above illustrates the stakes of such a
rebalancing, assuming that the behaviour of economic agents and
major financial flows remain constant.
10
CONSEIL DES PRÉLÈVEMENTS OBLIGATOIRES
The CPO points out that, for a reform of this magnitude, it
would be necessary to gradually implement its effects over time and
to allow for the possibility of applying a grandfathering clause to take
account of the legitimate situation of individuals who have made an
investment under a previous tax regime.
Ultimately
,
such a dynamic would not only make housing
taxation more consistent with economic realities and the new
environmental challenges, but would also secure its yield and the
funding of local public services and, more broadly, improve the
overall progressiveness of the French social and fiscal system.
FOR A MORE COHERENT HOUSING TAX SYSTEM
11
LIST OF RECOMMENDATIONS
Orientation 1: Bringing tax measures into line with the economic
value of housing
Recommendation 1: Limit housing-related tax expenditure over time
and systematically assess it, so that only expenditures with a proven
economic, social or environmental impact are retained.
Recommendation 2: Complete existing databases on housing,
particularly its taxation, and provide statistical expertise.
Recommendation 3: Review the methodology for estimating the
property tax base to establish a more direct and easily updateable link
with rents or market prices.
Recommendation 4: Extend the list of municipalities subject to the
tax on vacant accommodation by excluding areas in decline, and
remove the option for municipalities and public inter-municipal
cooperation bodies to introduce the tax on vacant accommodation.
Orientation 2: Prefer targeted budgetary aid to tax incentives to
meet the new challenges facing the building industry
Recommendation 5
: Confirm that the “Pinel” scheme will not be
renewed and the absence of an equivalent scheme to replace it.
Recommendation 6: Reopen the zero-rate loan to older homes with
work carried out in areas where the housing market is tight, to make
it more consistent with environmental issues.
Recommendation 7: Raise the 5.5% VAT rate on energy-efficient
renovation to the level of the intermediate rate of 10% and use the
financial gain thus obtained for targeted budget support for energy-
efficient renovation of housing.
12
CONSEIL DES PRÉLÈVEMENTS OBLIGATOIRES
Orientation 3: Reinforce the neutrality of housing taxation to
promote the resilience of the housing market
Recommendation 8: Once the link between the property tax base and
the economic value of the homes taxed has been re-established, a
review of the level and allocation of property transfer taxes should
be undertaken, with the aim of reducing the tax on home purchases
and offsetting the shortfall in public finances by increasing taxes on
home ownership.
Recommendation 9: Limit the retention of property by replacing the
allowance on capital gains from the sale of land and property for the
length of time held by taking account of changes in construction
prices and improvement work carried out by the vendor, and by
increasing the flat-rate tax on bare land that has been made buildable.
Recommendation 10: Consolidate and unify the tax regimes for
furnished and unfurnished rentals.