A property dealer holds its buildings as inventory (a current asset), which rules out depreciation. When the taxpayer decides to allocate a building permanently to letting or to long-term holding, this change of use requires an accounting and tax transfer from inventory to fixed assets, opening the way to depreciation. The case law of the Conseil d'État (notably the conclusions of V. Daumas of 9 April 2014 under decision no. 358278) and the BOFiP administrative doctrine nevertheless require objective proof of this management decision, which must be final and not provisional. A mere stated intention, or a transitional letting arrangement, is not enough, as the Administrative Court of Appeal of Nancy reiterated in a ruling of 16 March 2023.
The tax regime of the property dealer rests on an accounting and tax classification: buildings held for resale are recorded as inventory. This classification has two consequences: (1) it is impossible to depreciate the asset (inventory does not depreciate over time, it turns over); (2) the profit is taxed as business income at the time of resale, on the margin realised (standard BIC regime).
When the property dealer decides to allocate a building permanently to a use no longer directed at resale, typically long-term letting or long-term holding, it makes a management decision that takes that building out of the property dealer regime. The asset is then transferred from the inventory account to the fixed assets account, opening the way to depreciation.
The courts are demanding as to the proof of this change of use. A stated intention is not enough. The taxpayer must demonstrate, through objective elements, that the decision is final and not provisional. The Administrative Court of Appeal of Nancy, in a ruling of 16 March 2023, illustrated this requirement by holding that a mere internal letter dated 30 May 2000 did not objectively establish the change of use, and consequently upheld the reassessment.
The proof must rest on a body of objective indicators, not on a single document.
Minutes of a general meeting or of a board meeting recording the change of use, dated and signed. This document, the most persuasive of all, must clearly state the decision to remove the asset from inventory and record it as a fixed asset, setting out the reasons for the change of use. Failing that, a manager's decision formalised in a written instrument with a certified date.
The asset must be actually removed from the inventory account (generally class 3) and recorded in a fixed-asset account (class 2). This entry must be posted as at the date of the decision and be consistent with the depreciation subsequently charged. Inconsistent accounts, with an asset left in inventory while being depreciated, considerably weaken the taxpayer's position.
The asset must be given a physical allocation that is not provisional: long-term letting, retention as a business asset (registered office, business premises), entry in the fixed-asset register. A short-term letting arrangement oriented towards a near-term resale does not take the asset out of the regime; it remains within the logic of inventory.
The tax filings made after the decision must reflect the change: declaration of rental income (property income or BIC as the case may be), depreciation schedules, entry value recorded under fixed assets. An inconsistency between the declared decision and the tax filings actually submitted is a strong indication that no genuine management decision was taken.
The body of indicators must be consistent over time. The decision must form part of an overall strategy (redirection of the business, diversification of assets, planned transfer to the next generation). A change of use followed shortly afterwards by a resale weakens the position: the tax authorities may recharacterise it as a simple continuation of the property dealer regime and disallow the depreciation charged in the meantime.
The firm secures inventory-to-fixed-assets transfers in two stages. Upstream: analysis of the tax opportunity (depreciation benefit versus loss of the margin regime on resale, interaction with the IFI, impact on wealth transfer), formalisation of the decision (general-meeting minutes, accounting entries, alignment of the tax filings), and assembly of the evidentiary file (instrument, leases, fixed-asset register).
Downstream, in the event of a reassessment: analysis of the grounds to be argued before the courts, namely the final nature of the decision, the body of indicators, and the consistency of the accounts and returns, in order to defend the taxpayer before the administrative court and then the administrative court of appeal.
Because they are classified as inventory and not as fixed assets. Inventory consists of current assets held for resale: it is not subject to lasting depreciation but to turnover. Depreciation is, conversely, the accounting and tax mechanism that records the wear of a fixed asset used by the business on a lasting basis. The distinction is set out in the French general chart of accounts and in the BOFiP doctrine (notably BOI-BIC-CHG-20-10-10, which deals expressly with the inventory/fixed-assets distinction).
Through a final management decision to transfer the asset from the inventory account to the fixed-assets account. This decision presupposes a lasting allocation of the asset to a use no longer directed at resale: long-term letting, retention as a business asset, or lasting integration into the holding structure. The decision must be formalised (general-meeting minutes, manager's instrument), reflected in the accounts, and consistent with the subsequent tax returns.
It is the requirement, set out notably in the conclusions of Vincent Daumas under the Conseil d'État decision of 9 April 2014, no. 358278, that the taxpayer demonstrate its management decision through tangible and verifiable elements. A mere stated intention is not enough. A body of indicators is needed: a formalised corporate decision, accounting entries, long-term leases, consistent tax filings, and a lasting period of allocation. The Administrative Court of Appeal of Nancy, in a ruling of 16 March 2023, illustrated this requirement by holding that a mere internal letter was not enough to objectively establish the change.
The tax authorities refuse to recognise the exit from the regime and therefore disallow the depreciation charged. They add the depreciation back to the taxable result, reassess corporate income tax or personal income tax for the years concerned, and apply late-payment interest under article 1727 of the French Tax Code (2.40% per year). If the tax authorities further consider that the accounting classification was deliberately incorrect, they may add a 40% surcharge for deliberate breach (French Tax Code, art. 1729 a), or even 80% for fraudulent conduct in the most serious cases.
No. Letting on a short-term basis, or with a near-term resale in prospect, remains within the logic of the property dealer regime: the asset continues to be held for resale. Exiting the regime presupposes an allocation that is lasting and not provisional: long-term leases, a durable entry in the fixed-asset register, and a prospect of retention beyond the expected depreciation period.
This is the most delicate scenario. If the resale takes place shortly after the change of use, the tax authorities may take the view that the management decision was not genuinely final and recharacterise the transaction, with retroactive disallowance of the depreciation and reassessments. If the resale takes place long afterwards (several years of actual allocation), the asset is sold as a fixed asset: the capital gain is computed under the rules applicable to disposals of business assets (long-term or short-term BIC regime as the case may be, or the private capital-gains regime for real estate depending on the taxpayer's status).
Three steps: (1) formalise the decision (general-meeting minutes, manager's instrument) with a certified date and detailed reasons; (2) reflect it in the accounts immediately (transfer from inventory to fixed assets, depreciation starting as at the date of the decision); (3) give the allocation tangible form (signature of long-term leases, durable registration, consistency of the tax filings). A prior review by the firm makes it possible to assemble a solid evidentiary file capable of withstanding a tax audit.
Topics frequently connected with exiting the property dealer regime.
Overview: commitment to resell, commitment to build, extensions, takeover of commitments.
Voir la page Property dealerThe opposite risk: recharacterisation of private transactions as a hidden (undeclared) activity.
Voir la page Furnished lettingsThe hub for letting activities: LMNP/LMP, para-hotel services, wealth transfer.
Voir la page Real-estate practiceThe general framework of real-estate transactions and their tax regimes.
Voir la pageA confidential initial discussion to formalise the management decision, assemble a solid evidentiary file and defend your depreciation in the event of a tax audit.
© BENSAID Avocats — The information on this site does not constitute legal advice and is no substitute for personalised tax analysis.