Our advice for buying and selling real estate
There are several strategies that can be adopted: building a house and reselling it, buying a property in poor condition and renovating it, or buying a building or large apartment and dividing it into several units to maximize profit.
Buying and selling involves acquiring real estate with the aim of quickly reselling it with the aim of making a capital gain. Several strategies can be adopted: building a house and reselling it, buying a property in poor condition and renovating it, or buying a building or large apartment and dividing it into several units to maximize profit. Although this process is attractive on paper, it is not without risk. We give you all our advice to make a purchase and sale without making any mistakes.
Buying and selling real estate: which legal status should you choose?
You do not have to adopt a specific legal status to complete a purchase and sale transaction. The law does not mandate this. However, by engaging in this activity as an individual, you put yourself at significant risk. If the transaction goes wrong, you will be fully liable for any debts you incur. Depending on your marital property regime, your husband or wife may also be jointly liable for their debts. This is especially true for joint property acquired after marriage and spouses under a universal joint property regime.
Finally, as an individual, you will pay more tax on the capital gains you earn than any professional. This is why it is advisable to act as a property dealer when buying and reselling real estate.
Property dealer status for buying and reselling real estate
Property dealer is not a legal status in itself. It is an unregulated commercial profession that requires a legal structure to practice. You have two options: a small enterprise or a commercial company.
A small enterprise
The advantage of this is that it can be set up with very little formality and does not require rigorous bookkeeping. However, it is not very suitable for a buying and selling business. In fact, your liability is unlimited, as if you were an ordinary person.
Also, to maintain the benefits of small-enterprise status, your annual turnover cannot exceed €176,200 excluding VAT, which can quickly become a bottleneck for your business.
Finally, you cannot deduct your expenses, such as renovation costs, and you cannot charge VAT either.
Commercial company
You can engage in buying and selling activities alone, through an EURL (single-member limited liability company) or a SASU (simplified joint-stock company with a single shareholder). You can also form a SARL (limited liability company) or a SAS (simplified joint-stock company).
These structures seem quite suitable for this type of activity because:
Your financial liability is limited to the capital you have invested in your company. If you invest $7,000, your creditors can claim a maximum of $7,000.
The Articles of Association offer considerable flexibility.
Your turnover is unlimited.
You can deduct your expenses.
You can charge VAT.
You can choose to charge personal income tax or corporation tax on your profits.
Civil law company for real estate buying and selling
You may have considered starting your real estate buying and selling business as a French real estate civil law company (SCI). This is not possible due to the commercial nature of your activity. This is incompatible with the civil purpose of a real estate civil law company. Only unfurnished rental properties are legally permitted for an SCI.
The other option is to create a civil law company for construction and resale. However, this is also unsuitable for long-term buying and selling activities. The company is created for one purpose only: to build and resell a property, and only one. So you need to create a new company for each transaction.
What are the tax implications of buying and selling real estate?
The choice of legal structure for buying and selling real estate will affect VAT and capital gains tax.
VAT applicable to real estate buying and selling transactions
VAT for property traders
If you build a property for resale, i.e. offer a new property, you will be liable for 20% VAT.
However, if the property you are buying and reselling is more than 5 years old, you will not be subject to VAT. As a result, VAT is also not chargeable on renovation work. Be careful when budgeting for this work! You must include it in the total amount including VAT.
Note that, as an exception, if you carry out significant renovations to a property that is more than 5 years old to bring it back to new condition, the resale will be subject to VAT. VAT is charged on the gross price, not on the capital gains earned. In this case, you will be able to charge VAT on the renovations.
VAT on personal purchases and resales
Regardless of the type of property purchased and resold, you are not liable for VAT.
Capital gains tax on the resale of immovable property
If everything goes well, you should make a profit on the resale. The difference between the purchase price and the sale price is considered capital gains. The tax authorities tax it differently depending on whether you are working as an individual or as a professional.
Capital gains from purchase and resale for individuals
Only capital gains from the resale of your main residence are exempt from tax.
To benefit from the partial tax exemption, you must have held the property for at least 6 years, which is not your intention.
When purchasing and reselling, you can add the following costs to the purchase price:
Acquisition costs (notary fees, registration fees, etc.) in their actual amount or at a fixed rate of 7.5% on the purchase price.
Renovation costs (or a flat rate of 15% on the purchase price if you hold the property for more than 5 years).
Roads, utilities and distribution costs.
After applying the holding period allowance, this capital gain will be subject to income tax at a flat rate of 19%. You will also have to pay 17.2% social security contributions (after the holding period allowance). This brings the total tax to 36.2%.
Note that if the capital gain exceeds $50,000, an additional tax of 2% to 6% will apply, depending on the amount.
Two situations:
If you carry out your buying and selling activities through a company subject to income tax or as a micro-enterprise: the capital gain will be taxable under the BIC (Industrial and Commercial Profits) category. Therefore, it will be taxed at your marginal tax rate. You will also have to pay 17.2% social security contributions.
If you operate your business through a company subject to corporation tax: the profit will be taxed at the applicable corporation tax rate (normal or reduced).
Which loan is suitable for buying and selling real estate?
You have determined the most advantageous situation to reduce the tax burden on the purchase and sale transaction. Now you need to choose your financing. There is a special type of real estate loan: the buy-to-sell loan. It should not be confused with a bridging loan, as it operates on a different principle.
A bridging loan allows you to borrow up to 70% of the value of the property you are selling, minus the outstanding balance. It is a separate loan, in addition to the loan you are already paying.
On the other hand, a buy-to-sell loan combines your existing debt with the debt you need for the new purchase, and all have the same interest rate. As a result, there is only one line of credit, for which only one monthly payment is made, and its amount is determined in accordance with your debt-to-income ratio.
Once the sale is completed, you must repay a portion of the borrowed capital. You may also have to pay a penalty if you pay off the loan early. The amount of the monthly payment is then adjusted based on the remaining balance.
The term of a buy-to-sell loan is usually two years. Therefore, you must complete your real estate transaction within this period.
Good to know: You can ask the bank to include notary fees, guarantee fees, or real estate agency fees in the amount of the buy-to-sell loan. In reality, very few banks offer this facility, but you have nothing to lose by trying to negotiate!
How to Succeed in Your Real Estate Transaction?
We will now give you some practical advice that will help you succeed in your transaction and achieve significant capital gains.
Tip 1: Buy the property at the right price
You need to be familiar with the real estate market in your target area. When buying a property, you should already be thinking about reselling it. Therefore, you need to know exactly what is selling and at what price. To maximize your capital gains, you need to get a good deal when buying.
Here are a few ways you can explore to achieve this:
Sellers in a hurry: Divorce, job changes, or dividing inherited property these are all situations where a seller wants to sell quickly. As a buyer, you have every reason to take advantage of this opportunity by trying to negotiate a bargain.
Properties that need extensive renovation: Buyers don’t just wait in line for these types of properties. Don’t be put off by the cost; You can deduct many expenses from taxes! You can expect a significant increase in the value of the house or apartment, and as a result, a significant capital gain.
Tip 2: Design the renovations for your target market. Think about your target market for resale.
Are you targeting middle-class or high-income people?
In that case, your property will not need to be decorated in the same way. If you are not investing in luxury real estate, there is no need to go for expensive decorations! The key is to find the right balance between quality renovations and reasonable costs, so as not to jeopardize the profitability of your investment.
Sometimes, a simple home staging session can be enough. However, you want to present your property in a way that buyers can imagine themselves living there. Say goodbye to flashy colors, flashy designs, and anything else that might put potential buyers off! Keep it as simple as possible.
Tip 3: Get the right people
If you don’t have enough time and aren’t very skilled yourself, you’ll probably end up leaving the job to the professionals. Be careful when choosing them. If one of them disappoints you, the entire project could be at risk. Remember, your loan payments are still due during this time.
There’s no substitute for referrals to choose your tradesmen wisely. Ask your friends and family, tell others!
Once the project starts, make yourself available. Trust doesn’t mean you can’t supervise, so it’s in your best interest to visit the site to see how the work is progressing. Remember, the shorter the time frame, the more profitable the purchase-sale transaction will be.
Tip 4: Negotiate your mortgage
Of course, your primary goal is to obtain the best financing terms. However, do not ignore the terms of the offer, such as the term of the mortgage or the type of guarantee. Do not ignore the cost of loan insurance either. A broker can help you find the most advantageous financing for both of these products.
Tip 5: Do not underestimate the costs
Renovation costs, construction delays, unforeseen problems that require additional funds... Be careful when budgeting for the financing of your real estate purchase and resale. It is best to have some emergency cash flow on hand, as you may not be able to request an extension of time from your bank.
Tip 6: Prepare in advance for administrative procedures
You may have to apply for a building permit from the town hall. Or get a quick response regarding the connection of utilities. The administration may take time to process your request. Plan ahead and start the necessary process as soon as you sign the initial sales agreement.
Tip 7: Bring it to market at the right time
You have two options: sell before construction is complete or wait until it is completed. In the first case, you limit your risk, which is a significant advantage. On the other hand, some buyers are hesitant to commit to an off-plan purchase, which makes sense in favor of selling the property after it is completed.
Finally, would you prefer a direct sale or a sale through a real estate agent?
Generally speaking, you can make more money selling privately, because you don’t have to pay any commission. However, you will have to create the listing yourself, arrange inspections, etc.
It’s up to you to decide whether you have the time. You can also choose a non-exclusive mandate. If you can resell your property yourself, you won’t have to pay anything to the agent.
What are the options for buying and reselling real estate?
There is always some risk in investing in buy-and-sell properties. If you want to grow your real estate portfolio and generate additional income with greater security, know that there is an alternative: turnkey rental investment.
Unlike rental property investment, where you have to find a property and a tenant, the turnkey solution entrusts the entire management responsibility to professionals. They find a property for you, negotiate its price, connect you with their financing partners, oversee the construction phase, and connect you with professionals to rent out your investment.
What are the tax implications of buying and reselling real estate?
If you build a new property for resale, that is, offer a new property, you will have to pay 20% VAT. However, if the property you are buying and reselling is more than 5 years old, you will not have to pay VAT.
What is the tax on capital gains when reselling property?
If the difference between the purchase price and the sale price is positive, it is considered a capital gain. The tax authorities tax it differently depending on whether you are working as an individual or as a professional.