Bare owner: definition? What rights? What taxation?
Bare ownership is the Swiss army knife of real estate. A tool for both building up and transmitting assets, tax optimization, provident planning and retirement anticipation, sometimes all ex-nihilo: Investing in bare ownership in the commonly known as “Pierre-papier” is certainly one of the long-term investments with the best risk-return ratio. What is hidden behind this absurd term? Let’s solve the riddle together!
Bare ownership, what is it?
To better understand bare ownership, it is first necessary to situate it as a whole. Three elements form the full ownership of a property:
- The usus which is the right to use the property, in other words to live there;
- The fructus which is the right to perceive the fruits of the good, in other words to rent it;
- The abusus which is the right to dispose of the property in the long term, in other words to sell it, give it or bequeath it by a testamentary act.
Sometimes these three elements are separate and do not belong to the same person. In this case, we will speak of “dismemberment”. Behind this somewhat barbaric term, there is a widely practiced partition of separation or decomposition of the right of ownership, resulting from a succession or a real estate transaction.
The usus and the fructus together form the usufruct, which can be defined as the right to enjoy the property, that is to say to live in it or to rent it, which will generate rental income. (rent), but also maintenance costs.
The abusus, meanwhile, in the case of dismemberment, is also called bare ownership. Here we are. If usufruct is the right to use the property, bare ownership is the right to dispose of the property over the long term, after having acquired it at a lower cost. The dismemberment is temporary, for a fixed term generally from 3 to 20 years, or for life, and its conditions are fixed and known as soon as it is put in place. Thus, as you will have understood, at the end of the dismemberment, the bare owner recovers full ownership and can freely decide the future of the property: rent it back and collect the rental income, sell it, live in it, and why not demolish it, on the condition that it is the sole owner.
In which case can one become a bare owner?
Bare ownership is a process that is becoming more and more popular and practiced, generally to define one’s succession or to invest, and in particular in the following cases:
- The sale of an apartment in life annuity: The life annuity consists of selling the bare ownership of one’s main residence and retaining the usufruct. On the death of the inhabitant, the bare owner becomes the full owner;
- Life insurance contracts: Thanks to the dismemberment of the beneficiary clause, the life insurance subscriber can separately designate the usufructuary and the bare owner upon his death. Thus, the subscriber can for example designate his surviving spouse as usufructuary, and his children as bare owners. The widow or widow will be able to use the funds as they see fit, and the children will recover full ownership upon the death of the second parent, without incurring inheritance tax;
- Performance SCPI shares (Société Civile de Placement Immobilier): Investing in an SCPI consists of buying shares in a company that invests in a property complex, for a high rate of return. SCPIs in bare ownership allow investors to become bare owners and the management company, often a social landlord, to become usufructuary. Thus, at the end of the dismemberment, each bare owner becomes co-owner up to the amount of his investment;
- Anticipation of the succession: To reduce a heritage subject to inheritance tax, the ascendants can proceed during their lifetime to the dismembered donation which consists in transmitting to their heirs the bare ownership of one or more goods while retaining the ownership. ‘usufruct. Thus, the heirs are already partly owners, without the taxation associated with the property being their responsibility.
What are the rights of the bare owner?
By definition, the bare owner does not have the usufruct of the property. He does not collect the rents, is in no way in direct contact with the prospective tenant, and cannot decide to close a lease or occupy the accommodation. Remember, bare ownership is more of a real estate investment to avoid taxation than an investment designed for future use. His rights are therefore largely limited:
- The right to sell his share: If the bare owner cannot decide to sell the property without the agreement of the usufructuary(ies), he can however assign his share of bare ownership to recover his invested capital. This case remains rare since the rights of the tenant will prevent the bare owner buyer from using the property;
- The right to bequeath his share: Often to reduce a real estate heritage before the succession, the bare ownership can be bequeathed to the heirs or beneficiaries to escape inheritance rights;
- The right of deliberation: In co-ownership, the bare owner has the same voting rights in general meetings as the usufructuary, but only one can be represented there.
What taxation applies to bare ownership?
We come to the glory paragraph of bare ownership. The bare owner who does not have the use of the property, therefore no income from land, is not liable for the related taxes, in particular the IFI (Impôt sur la Fortune Immobilière), property tax, income from securities movables. It is the usufructuary who enjoys the property and receives any rental income who is liable for it.
We can therefore say that bare ownership is a real estate tax exemption system. Note also that it is possible, during the period of dismemberment, to deduct from its possible land income from other real estate its loan for 10 years, in the event that the investment in bare ownership is financed by a loan. It will be a land deficit (a financial burden without compensatory income) which allows tax exemption. It is therefore an interesting tax optimization for investors who already have substantial and taxable assets.
Obviously, the question of taxation arises at the end of the dismemberment, when full ownership of the property is regained. In this case, the classic taxation of real estate assets will apply, only on the capital gain realized between the initial real value of the property and its value at the end of the dismemberment. In other words, the capital gain realized between the discount of the bare ownership and its initial real value is not taken into account in the taxation.
For example, a building complex is worth €300,000. Mr X decides to invest up to €10,000. He will be able to position himself on a share of the property worth €16,000, which will have suffered a 40% discount because of entrusting only bare ownership. At the end of the dismemberment, the property is better rated and Mr. X’s share has taken 30%. By recovering full ownership, Mr. X has a share of the property worth €16,000 + 30%, i.e. €25,600 for an initial investment of €10,000. Mr. X will only be taxed on the capital gain of 30%, i.e. 25,600 – 16,000 = €9,600
The advantages of bare ownership
For those who are ready to invest a sum of money in stone-paper, opting for bare ownership has many advantages:
- An acquisition at a lower cost: One of the big advantages of bare ownership is the fact of acquiring shares in a property while benefiting from an immediate discount on the subscription price of up to 40%, since the bare owner does not hold the usufruct. The longer the duration of the dismemberment, the higher the discount;
- The absence of charge: It is up to the usufructuary, who collects the rents, to assume the charges related to the property, such as the check-in and check-out inventory, the maintenance repairs of the private parts as well as the municipalities, etc. However, the bare owner will retain his responsibility for larger repairs that involve the structure of the property (its load-bearing walls, beams, roofing, etc.);
- No increase in taxation: The bare owner is not affected by the burden of taxation since he receives no property income and the bare ownership is not taxable by the IFI (tax on the Real Estate Fortune). You should even know that in the event of acquisition on credit, loan interest is deductible from other property income provided that the usufructuary is a social or taxable lessor;
- Respect for your investment capacity: Bare ownership allows you to invest in a real estate program while adjusting your participation according to your available savings. An investment of a few hundred euros can ultimately allow you to hold a share of ownership of a property;
- Real estate capital gain: As we know, except in rather exceptional cases, real estate does not devalue and remember that a discount is applied to the purchase price of the shares. At the end of the dismemberment, the investor can therefore largely hope to make a capital gain on the resale. Only the capital gain due to the valuation taken by the property over time will be subject to tax, and not the capital gain due to the discount obtained on the purchase of the shares;
- The revaluation of the shares: Because real estate increases in value over time, the investor’s shares can potentially be revalued, excluding the final capital gain.
However, all these advantages can be offset by the absence of income during the dismemberment period. A separation of ownership rights of a property for 20 years, for example, can be problematic for some investors whose financial situation may change.