LMP & LMNP: Loi de Finance 2011 and its Impact

The Loi de Finances pour 2011 (Finance Law for 2011) in France brought significant changes to the tax treatment of furnished rental income, particularly concerning the statuses of Loueur en Meublé Professionnel (LMP) and Loueur en Meublé Non Professionnel (LMNP). Understanding these statuses and how the 2011 law modified them is crucial for individuals investing in furnished rental properties in France.

Prior to 2011, the requirements to qualify as an LMP were primarily based on two conditions: earning more than €23,000 in gross furnished rental income annually and having this income exceed the other professional income of the household. If these conditions were met, the rental income was considered professional income, subject to social security contributions and generally taxed more favorably, especially with regards to deducting deficits.

The Loi de Finances pour 2011 redefined the criteria for qualifying as an LMP, making it considerably more difficult to achieve this status. The new definition stipulated that, in addition to the pre-existing conditions regarding income thresholds and comparison to other professional income, the individual had to be registered with the Registre du Commerce et des Sociétés (Trade and Companies Register) as a professional lessor. This registration implied actively participating in the rental business as their primary professional activity.

The key impact of this change was a significant reduction in the number of individuals qualifying as LMP. Many investors who previously met the income-based criteria no longer qualified due to not being registered professionally. This had several consequences:

• Increased Social Security Contributions: Previously, LMP status allowed for certain social security exemptions. With the tighter criteria, many investors fell under the LMNP regime, potentially facing higher social security contributions on their rental income.
• Taxation of Capital Gains: When selling a furnished rental property, LMP status previously offered the possibility of exemption from capital gains tax under certain conditions relating to the length of the activity and the amount of revenue. The stricter definition reduced the opportunities for claiming this exemption.
• Deficit Treatment: Under the LMP regime, rental deficits could be offset against overall income without limits. With the shift to LMNP, deficits could only be offset against rental income of the same nature, with any excess being carried forward for a maximum of ten years.

The LMNP status, while not directly impacted in its definition by the 2011 law, became more relevant as fewer individuals qualified as LMP. LMNP status applies to individuals renting furnished properties who do not meet the LMP criteria. LMNP offers some tax advantages, notably the ability to deduct expenses and depreciation, and the choice between the micro-BIC (simplified taxation) regime or the régime réel (actual expenses) regime. However, as noted above, it differs significantly from LMP regarding deficit treatment and social security contributions.

In conclusion, the Loi de Finances pour 2011 fundamentally altered the landscape of furnished rental taxation in France. By tightening the definition of LMP, it effectively made it more challenging for investors to access the tax benefits associated with professional lessor status, leading to increased social security obligations and altered tax treatment of rental income and capital gains.