A little-known product in real estate investment, Bare Ownership (BO)/ Nue-Propriété (in French, NP) nevertheless has more than one advantage. Taxation, liquidity, practicality, it is also an excellent hedge against inflation. PATRIMOLINK introduces you to, or reintroduces you to, Bare Ownership (as it is familiarly called), and its peculiarities.
Bare-Ownership: definition
Bare Ownership is a legal concept in property law governed by the French Civil Code. It refers to the division (or dismemberment) of Full Ownership: Bare Ownership (abusus) and Usufruct (usus fructus).
– Bare Ownership or “abusus”: it is the right of ownership of a property, but without the right to use it or to receive income from it. In other words, the holder of bare ownership owns the property itself but cannot directly enjoy it or derive benefits from it during the period of dismemberment.
– Usufruct or “usus” and “fructus”: it is the right to use the property and to receive income from it (such as rents, interests from investments, etc. – the “fructus”) for a specified period or until the death of the usufructuary. The usufructuary does not own the property itself, but has the right to enjoy it as if they were the owner during the term of the usufruct. The rights of usufruct are detailed in the Civil Code (Articles 578 to 624).
The separation between bare ownership and usufruct can be established within the framework of real estate investment strategies, as well as estate planning or wealth strategies aimed at optimizing the transfer of assets between generations. For example, a parent may decide to transfer the Bare Ownership of a house to their children while retaining the usufruct, allowing them to continue living there and receiving rents.
This article will focus on investment Bare Ownership, detailing its rules, specificities, and advantages in terms of investment. In this case, usufruct is transferred to an institutional or private landlord, who is responsible for operating the property and receiving income from it.
What are the advantages of purchasing? Bare Ownership allows you to purchase real estate at a significant discount (from 23 to 38%), depending on the duration of dismemberment (between 10 and 15 years). This discount corresponds to the loss of income from transferring usufruct to a third party. At the end of this period, you will recover full ownership of the refurbished property, and you can use it as you wish (sell, occupy, rent out).
The projects involved are often located at addresses where there is strong land pressure, which usually allows for the appreciation of the property and the return on investment in the long term.
Thanks to a dual mechanism of investment appreciation: gains are made at the time of purchase (due to the discount on the market price) and at resale (reduction of capital gains tax calculated based on the market price). The leverage effect is interesting: you invest 70% in a property (in the case of a 30% discount), but your assets appreciate by 100% of its value.
NP emerges as a relevant diversification product for your assets.
Bare-ownership: An anti-inflation investment product
Inflation has been one of the most impactful economic factors in recent months for the French real estate market. Beyond a deteriorated economic context, the sudden increase in prices has pushed interest rates higher, complicating many investment projects. Peaking at 6.3% in February 2023, the CPI (Consumer Price Index) is now slowly declining, but borrowing rates remain high.
Inflation rate in France
By investing in NP, you are placing your savings in a secure product: its price (reduced) is not affected by the general increase in prices. For investors who have taken out a loan, the rates practiced in France are fixed. Taking out a loan in an inflationary context can work in your favor: with inflation, the fixed amount of your monthly payments decreases. Let’s take, for example, a monthly payment of 700 euros, with a salary of 2500 euros. If inflation increases by 5% each year for 7 years, just like your salary, you end up repaying 700 euros with a salary of 3500 euros. Your debt ratio thus decreases from 28 to 20%
It is also worth noting that case law has confirmed that the failure to obtain the expected loan amount constitutes a suspensive clause in a sales contract. Borrowers are thus protected in the French market.
Bare-ownership: a favorable taxation
The structure of the split allows for optimizing the impact of taxation on your investment. It is worth noting that the legal framework of Bare-Ownership is set in the Civil Code, and not in tax legislation subject to change. It thus provides real legal security.
Several types of taxes are concerned:
– Reduced notary fees: also known as Droits de Mutation à Titre Onéreux (DMTO), are payable at the time of the property acquisition. These fees are reduced in the case of acquisition in Bare-Ownership because they are calculated based on the discounted value in full ownership according to the duration of the split. The taxable base calculated is even more favorable when the duration of usufruct is over 10 years. Indeed, for an usufruct between 10 and 20 years, the taxable base will be 54% of the value in Full Ownership (see Art 669 2 of the CGI – Amended Finance Law for 2012 promulgated on August 16, 2012).
– Income taxation: a property acquired in Bare-Ownership benefits from a discount and does not generate income flow. It is therefore not subject to income tax, nor (in the vast majority of cases) to IFI (Wealth Tax on Real Estate, see Art 968 of the CGI, Finance Law for 2018).
– Deduction of loan interests: it is possible to optimize taxation by taking out a bank loan to finance the acquisition of a property in Bare-Ownership. It is thus possible to deduct the loan interest from this credit against other rental income received. Please note, this mechanism is only possible when the usufruct is held by a social purpose institutional lessor (see Art 31 of the CGI, BOI-RFPI-BASE-20-80-20170901 n°171).
– Local taxation: as a naked owner, you are not liable for property taxes; it is the lessor who pays them.
– Capital gains taxation: it is calculated on the market value of the property (and not its acquisition price) at the time of acquisition, increased by the rates in force, representing a significant advantage (see the official bulletin of public finances BOI-RFPI-PVI-20-10-20-10).”
– Succession taxation: Bare-Ownership allows for effective estate planning. In most cases, parents bequeath the Bare-Ownership of a property while retaining the usufruct. This allows them to secure their old age while starting to transfer their assets without paying excessively high gift taxes. Taxes are indeed reduced as they are calculated based on the value in Bare-Ownership, rather than Full Ownership. As with notary fees, the taxable base calculated is even more favorable when the duration of usufruct exceeds 10 years. For an usufruct between 10 and 20 years, the taxable base will be 54% of the value in full ownership.
Investment Bare- Ownership and Succession Bare-Ownership (which follows distinct rules) thus represent an optimized investment concerning the main taxations related to real estate ownership.
Bare-Ownership : A Product Sheltered from Rental Risks
By investing in Naked Ownership, you avoid all the risks associated with renting during the duration of the split. Indeed, it is a third party who takes care of managing the property. They bear the risks of vacancy, unpaid rents, and water damage. By contract, they are obligated to return the property to you in perfect condition, regardless of any potential damages incurred.
“Please come back later, we are not done with tidying up the apartement”
Bare-Ownership fits into a liquid second-hand market. You will not have any more difficulty reselling your property before the end of the split if you wish.
Bare-Ownership thus proves to be an effective investment product to shield your assets from the vicissitudes of the economy. Immune to inflation, it offers a healthy and secure investment for your savings. It also offers numerous advantages in terms of (simplified) management and (adjusted) taxation.
Sometimes more challenging to finance, it is advisable to seek assistance from appropriate professionals.
Are you considering investing in Bare-Ownership? We are here to help you realize your real estate project!
Content provided for informational purposes only and does not replace current regulations. Without consultation with our experts, PATRIMOLINK cannot be held responsible for any potential consequences of implementing the advice and information provided in this article.
