The global real estate crisis has evolved into a housing crisis. In countries like Canada, the United States, France, China, Portugal, and Italy, emergency measures are now entwined with political pledges, making it difficult for investors to plan for the long term. Real estate professionals are directing them towards a lesser-known option: investing in bare ownership. Which countries favor this type of investment? How does it help in addressing the housing crisis?
Understanding investment in bare ownership?
To understand bare ownership, it's essential to recognize that property ownership comprises two primary rights: the right to use the property (usufruct) and the right to dispose of it (bare ownership). The usufruct allows the owner to occupy the property, manage it, or collect rental income. Bare ownership, on the other hand, enables the owner to sell, bequeath, or donate the property. Full ownership combines these two rights.
However, ownership can be "divided" when several parties hold these rights, a common scenario in inheritances where multiple usufructuaries exist. Investing in bare ownership represents one such division. In this arrangement, an investor relinquishes the usufruct—typically to the seller—as stipulated in the sales contract, which allows the seller to retain property use for a set period, usually 10 to 20 years. During this time, the buyer gains no immediate benefits from the property, not even rental income. Full ownership reverts to the buyer at the end of the specified period.
The contract must outline the conditions under which the usufruct will terminate, which could be due to the usufructuary's death, the lapse of the agreed period, or the fulfillment of a specific condition.
Investment in bare ownership: A strategic advantage for expats and overseas French nationals
At first glance, investing in bare ownership might seem unprofitable since the bare owner cannot generate immediate profits. However, this form of investment is particularly advantageous in the long term, making it an attractive option for expats in France and French nationals living abroad. Bare ownership is becoming increasingly popular in France for several compelling reasons:
Significant discount: The investor purchases the property at a discount of about 30% to over 50% below the market price, a strategic advantage during a housing crisis. This discount is intrinsic to the nature of bare ownership, as the investor does not acquire the usufruct.
Tax exemptions: During the duration of the bare ownership contract, the investor is exempt from various taxes and duties such as property tax, housing tax, wealth tax, and income tax on property revenues. This is another benefit of bare ownership; since the buyer does not enjoy the property's usufruct, they are not liable for the related taxes and duties. The only tax payable is the capital gains tax during resale, which is shared with the usufructuary.
Maintenance and repairs: The usufructuary seller is responsible for the property's expenses, including major repairs and routine maintenance. Under the terms of bare ownership, the usufructuary enjoys the property and hence bears all associated costs. This arrangement relieves the investor from ongoing maintenance responsibilities, further enhancing the investment's appeal.
The appeal of bare ownership for expatriates
Bare ownership offers a strategic investment opportunity for foreign residents in France, too, enabling them to secure property ownership for the long term. This arrangement is equally beneficial for French nationals living abroad, who can invest without the burden of property maintenance—responsibilities that fall to the usufructuary. This allows them to invest with plans of returning to France.
Another compelling aspect is the current political climate. Despite the recent appointment of a new Prime Minister, France continues to face political uncertainty, particularly concerning potential reforms in rental taxation that might equate to the taxes on furnished and unfurnished rentals. However, since bare ownership does not generate rental income, such investments remain unaffected by these potential reforms. Real estate experts often highlight that the benefits of bare ownership surpass its primary drawback.
Nonetheless, bare owners must recognize that their investment is not about immediate rental yields but a long-term real estate investment. If financed through a loan, expatriates cannot depend on rental income to repay it, necessitating a solid financial plan.
Bare ownership gains ground in Europe
Bare ownership is not only making strides in the United States but has also become a prominent investment strategy in Europe, where it is increasingly viewed as a potential solution to the housing crisis. The approach has steadily risen in popularity, particularly in Spain, where sales figures have consistently grown since 2014. In 2023, a significant milestone was reached with 1,845 housing units sold under bare ownership, marking an 11.3% increase from the previous year and the highest number since records began in 2014.
This investment model is particularly attractive to expatriates planning for retirement or looking to invest in a second home. With its appeal to American expats, including digital nomads and retirees, Spain has become a hotspot for those looking to leverage bare ownership to secure properties at nearly half the market rate.
American real estate agencies specializing in international property investments have been pivotal in promoting this strategy. They advocate for bare ownership as an excellent method for acquiring premium European properties at reduced prices. The long wait associated with bare ownership, often seen as a drawback, is marketed as a benefit by these agencies, appealing to expats seeking long-term investments. Predominantly, American buyers are drawn to properties in Spain, Italy, Belgium, and France, attracted by the significant cost savings bare ownership offers.
Usufruct ends with the seller's death: What are the implications?
The option for the usufruct of a property to end upon the seller's death is a key feature of bare ownership contracts that, while not widely recognized, has been chosen by many elderly usufructuaries. This arrangement raises several questions and concerns, distinguishing it from a life annuity sale—it is, instead, a sale in bare ownership.
In Spain, specialists in bare ownership contracts note that the discount offered to the buyer varies with the age of the usufructuary seller. For example, if the seller is considered "moderately aged" (around 70 years), the buyer might receive a discount of approximately 50%. However, if the seller is older, this discount may be reduced. Additionally, the geographical location of the property also influences the discount; properties in highly desirable areas tend to have smaller discounts due to higher demand.
While the financial advantages are clear, the principal drawback of this arrangement is the ethical and practical considerations of basing an investment on the seller's life expectancy. This can be risky, as the investment could become less advantageous if the seller lives significantly longer than expected, potentially even outliving the buyer.
Life lease transfer contract: An alternative to bare ownership
To mitigate the speculative elements often associated with bare ownership, some real estate professionals are advocating for the life lease transfer contract as a preferable option. This contract transforms the seller into a tenant of the property post-sale, whereby they receive 80 to 90% of the property's sale price upfront. If the property is their primary residence, it remains tax-exempt. This arrangement also provides flexibility for the seller, as they have the freedom to terminate the contract by choosing to move.
Unlike the usufructuary arrangement, where the seller must cover all related expenses under a life lease transfer contract, the seller-tenant enjoys exemptions from certain taxes, such as property tax, and is not responsible for some major repairs. From the buyer's perspective, acquiring the role of a landlord comes with benefits: the presence of a tenant ensures the property is well-maintained and generates a stable rental income through the established rental agreement. The purchase price is typically reduced by about 10 to 20% to reflect the property's occupied status, offering a balanced investment opportunity with both protective measures for the seller and financial advantages for the buyer.
Bare ownership: Considerations for country-specific legislation
While purchasing divided property is gaining popularity across Europe, it's crucial to recognize that the legislative landscape varies significantly from one country to another. For instance, Belgium does not offer the tax advantages associated with bare ownership property transfers (such as donations during the seller's lifetime) that France does. Furthermore, the taxation of usufruct in Belgium differs markedly from that in France, and Belgium, along with Portugal, does not acknowledge the concept of "quasi-usufruct," which is recognized under French law.
In Luxembourg, the legal definition of bare ownership diverges from those of France and Belgium. Luxembourgish law treats the bare owner as having full ownership rights over the property, with the usufructuary regarded as a creditor rather than having any direct property rights. Consequently, any fiscal responsibilities are attributed to the bare owner, not the usufructuary.
Moreover, the concept of divided property ownership does not align with English law. Scotland has a system that resembles a life annuity rather than bare ownership, and a similar concept in England is the "life interest trust," where an individual may receive property income or enjoy the use of the property until their death or the contract's termination.
Given the complex and varied legal frameworks across different jurisdictions, consulting with professionals who specialize in international bare ownership and expatriate advisory services is highly recommended. These experts can provide crucial guidance on donations, inheritance, and tax implications specific to each country.
