Property Division: How Does It Work, and When Should You Use It?
Our CENTURY 21 Auteuil Immobilier and Auteuil Seine offices will explain this widely used legal and tax tool for estate planning andreal estate investment.
What is property division?
Property rights consist of three elements:
- Usus: the right to use the property;
- The fructus: the right to receive income from it (rent, annuity, etc.);
- Abusus: the right to dispose of property (sell, give away, or transfer).
When these three attributes no longer belong to the same person, this is referred to as a division of ownership. Full ownership is then divided among:
- A usufructuary, who retains the use of the property and the income from it;
- A bare owner, who holds the title to the property and will become its full owner upon the termination of the usufruct.
The division of ownership may be temporary (for a term specified in the contract) or for life (until the death of the usufructuary). At the end of this period, the ownership is reunited: the bare owner automatically regains full ownership without having to pay any additional fees.
What is usufruct in a division of property?
Usufruct is the right to:
- To occupy the property or to let a family member live there;
- To lease it and collect rent from it;
- To participate in day-to-day decisions, particularly regarding the condominium.
In return, the usufructuary must:
- Maintain the property and perform routine repairs;
- Pay taxes related to occupancy, such as the housing tax; however, the property tax is generally the responsibility of the bare owner;
- Report rental income to the tax authorities.
Usufruct is, by its very nature, temporary: it ends either at the specified time (temporary usufruct) or upon the death of the usufructuary (life usufruct).
What is bare ownership in a division of property?
Naked ownership is the right to dispose of the property: the naked owner may, in theory, sell or transfer their naked ownership, but always without infringing on the rights of the usufructuary.
During the term of the division of ownership, the bare owner:
- May neither occupy the property nor collect rent ;
- Generally accommodates major repairs (roofing, load-bearing walls, structural work, etc.).
In return, he knows that he will become the full owner upon completion of the division of property, with no additional inheritance taxes if the usufruct terminates upon death. This is what makes it a very attractive option for heirs.
Why divide a property?
There are several reasons why someone might choose to divide up their estate:
- Planning your estate: Transferring bare ownership to your children while retaining the right of use allows you to gradually pass on your assets, while continuing to live in the property or collect rent;
- Reducing tax liability: Gift taxes are calculated solely on the value of the bare ownership interest, which is generally lower than that of full ownership. Furthermore, with regard to the IFI, it is often the usufructuary who is taxed on the value of the property;
- Investing at a lower cost: Purchasing bare ownership of a property or shares in an SCPI allows you to benefit from a discounted price (often 30 to 40 percent less than full ownership, depending on the age of the usufructuary) See the Schedule under Article 669 of the General Tax Code), with a view to regaining full ownership at a later date;
- Arranging for the Spouse’s Protection: In the event of a death, the spouse may receive the usufruct of the family home, and the children may receive the bare ownership.
