Should you purchase your primary residence through a holding company?

Understanding what a holding company is and its different types

Definition and role of a holding company

A holding company is a legal entity established to hold shares or interests in other companies, typically within the framework of a group strategy. Its main role is to control the subsidiaries it owns, centralize management, and optimize financial flows. Depending on its purpose and activities, a holding company can take different forms: patrimonial (asset management), operational, or mixed.

Specifics of a patrimonial holding company

A patrimonial holding company is dedicated to managing non-commercial assets, such as real estate or financial investments. Unlike an active holding that oversees day-to-day operations of subsidiaries, the patrimonial holding focuses on preserving and transferring wealth. It allows for the consolidation of various family assets while benefiting from certain tax mechanisms, such as the fiscal integration regime.

Why use a holding company for real estate acquisitions?

Establishing a holding company to invest in real estate, especially for acquiring a primary residence, is a strategy adopted by some investors to facilitate estate planning or reduce tax pressure. Depending on the chosen structure (holding company or a property management company — attached to the holding), it is possible to benefit from advantages such as the deductibility of loan interest or the possibility of transferring holding shares with partial exemption from gift tax.

What are the advantages of purchasing your primary residence through a holding company?

Tax optimization

Opting to buy your primary residence through a holding company can provide significant tax optimization benefits. Loan interest may be deductible from the holding's income, reducing the company’s taxable base. Additionally, dividends from other activities of the holding company can be used to finance the purchase, thus avoiding direct withdrawals from the shareholders' personal assets.

Protection of personal assets

Creating a holding company helps to separate company-owned assets from the personal assets of shareholders. Therefore, in case of financial difficulties, the company’s creditors cannot seize personal assets, except in cases of proven mismanagement. This asset separation is a major advantage, especially for business owners who wish to protect their primary residence from business-related risks.

Flexibility in asset management and transfer

A patrimonial holding company facilitates the transfer of assets to heirs by organizing succession through the transfer of company shares. Unlike direct ownership, which may incur high inheritance taxes, the transfer of shares allows for substantial tax deductions. Furthermore, this type of structure allows for more flexible management of real estate assets, making it possible to modify the capital structure without directly affecting property ownership.

Disadvantages of purchasing a primary residence with a holding company

Tax constraints and risk of requalification

Using a holding company to acquire a primary residence can lead to significant tax constraints. The tax authorities may consider this arrangement as an abuse of law if they believe that the structure lacks genuine economic purpose beyond tax optimization. In the event of requalification, tax benefits may be cancelled and penalties may be imposed. Additionally, purchasing a primary residence through a holding company does not qualify for the capital gains exemption applicable to primary residences.

Administrative complexity and costly management

Managing a holding company involves rigorous accounting and more complex administrative procedures compared to direct ownership. Organizing general meetings, managing dividends, and maintaining annual accounts incur additional costs (accounting and legal fees) that need to be factored in. These expenses can accumulate quickly, reducing the expected benefits of this arrangement.

Difficulty in financing and justifying the arrangement

Banks may be reluctant to finance the purchase of real estate through a holding company, as this arrangement is often seen as riskier and less transparent. Lending conditions are generally stricter, with higher interest rates and additional guarantees required. Moreover, it may be challenging to justify the economic rationale of this structure to tax authorities, especially if the holding does not generate significant income.

Comparison with purchasing via a Real Estate Civil Company

Advantages of the Real Estate Civil Company for a primary residence

The Real Estate Civil Company (SCI in french) is a legal structure frequently used for the acquisition and management of family real estate. Unlike a holding company, a civil company is primarily dedicated to the ownership and management of real estate and does not engage in commercial activities. Its main advantage lies in its ease of management and simplified taxation, with the possibility of distributing shares among several shareholders while organizing the transfer of ownership.

Disadvantages of the property management company for purchasing a primary residence

While a property management company offers benefits in terms of wealth management, it may not always be the best choice for acquiring a primary residence. The tax rules applicable to a real estate civil company can result in significant costs, especially in terms of corporate tax and capital gains. Furthermore, it is not possible to deduct interest on loans related to a property intended for personal use by the shareholders, which may limit the appeal of this structure compared to direct ownership or a holding company.

Holding vs. Property Management Company: which structure to choose for a primary residence?

The choice between a holding company and a property management company depends on various factors, such as the nature of the investment, the estate planning objectives, and the tax situation of the purchaser. A holding company may be more attractive for those who wish to consolidate multiple properties or activities within a single structure, while a property management company remains the preferred choice for family acquisitions intended to be passed down over time. A thorough analysis of each situation is therefore necessary before making a decision.

Whac does real estate tax law say about purchasing a primary residence through a holding Company?

Tax regime applicable to the holding company

When a holding company owns a real estate property, it is subject to the corporate tax (IS) or personal income tax (IR) regime, depending on the legal form chosen. The IS regime offers reduced tax rates on profits but also leads to the taxation of capital gains upon the sale of the property, without benefiting from the primary residence exemption. Conversely, the IR regime may be more favorable, but profits are then included in the shareholders’ personal income.

Taxation of capital gains on real estate

One of the main drawbacks of purchasing a primary residence through a holding company is the taxation of capital gains. Unlike direct ownership, where gains on the sale of a primary residence are exempt from tax, properties held by the holding company are subject to professional capital gains tax. This taxation is calculated based on the holding period and the chosen tax regime, which can result in significant taxation upon the sale of the property.

Consequences in case of property sale

In case of selling the primary residence held by a holding company, shareholders must consider double taxation: first at the company level (taxation of capital gains) and then at the personal level if they wish to distribute the profits as dividends. This double taxation can significantly reduce the return on the operation and constitutes one of the main obstacles to acquiring a primary residence through this type of structure.

Purchasing through your company: in which cases is it recommended?

Investor profiles suited to this structure

Acquiring a primary residence through a holding company is not a universal solution. It is mainly aimed at business owners or investors who already have a corporate structure and other assets under management. These profiles can benefit from the flexibility that a holding company offers for estate planning and optimizing personal taxation. Moreover, investors planning to hold multiple properties may find value in consolidating their real estate portfolio under a single holding company structure.

Examples of situations where a holding company is relevant

Setting up a patrimonial holding company can be relevant in the context of active real estate management or early succession planning. For example, a business owner who wants to gradually transfer their estate to heirs may choose to establish a holding company to transfer shares progressively while retaining control of the assets. It is also suitable for investors looking to consolidate several rental properties and optimize their taxation by consolidating the results of multiple entities within the holding company.

Precautions to take to avoid tax audits

To avoid tax audit and tax adjustment, it is essential to justify the acquisition of a primary residence through a holding company with a genuine economic purpose. The arrangement must be financially coherent and not merely aimed at avoiding tax. Furthermore, it is advisable to consult a professional before starting, like a tax lawyer, to ensure the viability of the project and compliance with tax authority criteria. Poor structuring could lead to financial penalties and cancellation of the expected tax benefits.

 

Acquiring a primary residence through a holding company can provide interesting tax and asset management advantages, but this arrangement also involves fiscal and administrative constraints that need to be carefully assessed before proceeding. This type of structuring is suitable for investors who already own an active or patrimonial holding company and wish to optimize their real estate management. However, an in-depth analysis and the guidance of a professional are essential to avoid potential pitfalls.

So, don’t hesitate to contact Sion Avocat Law Firm to ensure you make the right choice for your primary residence!

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