The Splitting of Real Estate: Advantages and Disadvantages

Property splitting involves dividing the full ownership of a real estate property into two distinct rights: usufruct and bare ownership. This technique, often used to optimize the management and transmission of wealth, has advantages but also disadvantages that should be well understood before committing. This article explores the mechanisms of property splitting, its advantages and disadvantages, as well as its tax implications.

What is Property Splitting?

Property splitting is a legal operation that separates the full ownership of a real estate property into two elements:

• Usufruct: The right to enjoy the property and receive its income, for example by renting the property.
• Bare Ownership: The ownership right without the enjoyment of the property. The bare owner recovers full ownership of the property at the end of the usufruct, usually at the death of the usufructuary.

Advantages of Property Splitting

Property splitting offers several advantages:

• Tax Optimization: In the case of donating a property in bare ownership, the taxable value is reduced, which allows for a decrease in donation taxes. For example, if a property is worth €300,000, the value of the bare ownership for a 60-year-old person will be 60% of the total value, i.e. €180,000.
• Asset Preservation: Property splitting allows for the transmission of a property to heirs while continuing to receive its income, ensuring income for the donor while ensuring the transmission of wealth.
• Income Security: The usufructuary can continue to receive rents from a rented property, which can be particularly interesting for retirees looking to supplement their pension.

Disadvantages of Property Splitting

Property splitting also has disadvantages:

• Legal Complexity: Property splitting requires a good understanding of legal and tax mechanisms. It is often necessary to consult a notary or legal advisor.
• Lack of Control for the Bare Owner: The bare owner cannot enjoy the property or receive its income as long as the usufructuary is in place, which can limit their options.
• Initial Cost: Setting up a property splitting can involve notary and registration fees, which can reduce the economic interest of the operation.

Real-life Examples

Suppose a 65-year-old owner wants to transfer an apartment to their child while continuing to receive rents. By splitting the property, they give the bare ownership to their child while retaining the usufruct. Upon their death, the child will become the full owner without having to pay additional taxes, as the property has already been transferred fiscally at the time of the donation.

Laws Regulating Property Splitting

Property splitting is regulated by the Civil Code, especially articles 578 to 624, which define the rights and obligations of the usufructuary and the bare owner. The General Tax Code specifies the tax rules applicable to donations in bare ownership and to the income received by the usufructuary.

Conclusion

Property splitting is an effective strategy to optimize the management and transmission of real estate wealth. Although it offers tax and wealth advantages, it also has disadvantages, particularly in terms of legal complexity and loss of enjoyment for the bare owner. Before implementing a property splitting, it is essential to fully understand its implications and consult a notary or specialized advisor to ensure that this solution is suitable for your wealth objectives.