PURCHASE OF BARE OWNERSHIP OF REAL ESTATE - DIVISION OF OWNERSHIP
Dividing ownership in real estate involves separating ownership of the property's structure from the right to use or benefit from it.
Applicable Taxpayers: Those with real estate income or subject to Wealth Tax (ISF). Type of Tax Benefit: Purchase of real estate at 40% to 60% of its value. Conditions to Meet: The usufruct of the property is transferred for a specific period. Note: Possibility of ISF reduction.
Mechanism: Dividing ownership of a property involves separating the structure ownership from its operational rights. There are thus two parts:
- Bare Ownership: The bare owner holds title to the property but cannot use it or earn income from it.
- Usufruct: The usufructuary has the right to occupy the property without paying rent, lend it, or collect income from it. They can enter or renew residential and commercial leases independently, choosing tenants and setting lease terms. In this arrangement, the usufruct is granted to an operator for 15 to 20 years, who benefits from the income. In return, the usufructuary contributes to the purchase, and after this period, the investor (bare owner) regains full ownership.
Conditions: Major repairs are the responsibility of the bare owner (the investor), including structural work, repairs to beams, and roof replacements (Article 606 of the Civil Code). Other repairs are maintenance-based and therefore the responsibility of the usufructuary, who must also pay annual charges, such as fire insurance, property taxes, and management fees.
Tax Advantage: Since rental income and operational expenses are designated to the usufructuary, the investor can only deduct major repairs from their real estate income (as per standard rules). Loan interest, however, is only deductible from real estate income, making it beneficial for the investor to have existing real estate income for these deductions.
Another advantage concerns the Wealth Tax (ISF), as only the usufructuary must declare the property at its full value. The investor’s property is not included in their ISF assets, and the Remaining Capital Due on the loan (CRD) is declared as a liability. Thus, this CRD can be deducted from existing assets for ISF purposes, reducing tax (if the investor qualifies for ISF).
End of Division: At the end of the usufruct period, the investor recovers full ownership and can benefit from the usufruct. They can then profit from renting the property but will be responsible for all expenses and must declare it as an asset for ISF purposes. The investor will have regained full ownership of the property, which they acquired at 40% to 60% of its value.
Acquiring Bare Ownership
Bare Ownership of a New Property
To meet growing needs for securing future supplementary income, protecting family assets, or reducing tax pressure, dividing ownership separates the right of use and enjoyment, or usufruct (USUS), from the right of bare ownership (ABUSUS). Usufruct is acquired by an institutional landlord for a period of 15 to 20 years, who is responsible for property management, routine maintenance, major repairs (Articles 605 and 606), property taxes, and condominium fees.
Bare ownership involves acquiring a property at a reduced price, where the reduction is derived from the cumulative discounted rental income over the usufruct period, entirely tax-free and obtained in a lump sum. This deduction from the purchase price incurs no tax. The benefits of bare ownership are multiple:
- Building high-quality real estate assets.
- Investing with peace of mind in a new property without the constraints of maintenance and management during the usufruct period.
- Receiving the cumulative rental income for the upcoming years immediately and without taxation.
- Gaining secure returns through a guaranteed mechanical value increase (the gradual reconstitution of ownership) and potential appreciation based on market conditions.
- Avoiding Wealth Tax (ISF) on the acquisition of bare ownership while the usufruct is held by the landlord.
- Limiting capital gains in case of resale, based on potential appreciation and the ownership period starting from bare ownership purchase.
- Deducting loan interest from real estate income in this purchase.
- Purchasing a “safe asset” with measured, regular savings efforts.
- Ensuring future capital or income, through resale or rental of the property, while protecting loved ones.
- Allowing donation or transfer of a new property to a family member, based on the value of bare ownership.
- Retaining freedom to sell bare ownership at any time without losing accrued economic and tax advantages.