To improve one’s income or retirement, life annuity makes it possible to sell one’s property (house, apartment or other) in exchange for a payment in the form of a life annuity by the buyer.
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What is real-estate life annuity?
The life annuity sale involves the real estate sale by an owner (the annuitant) to a purchaser (known as the debtor) who shall pay the price in the form of an annuity. This annuity is known to be "life annuity" because it shall lapse overnight on the annuitant’s death. It is possible and in fact often the case, that the seller occupies his home until his death. This is known as occupied life annuity. In the event of a sale by a couple, it is possible to provide a reversion pension, in favor of the survivor.
In a way, the seller supplies funds to the buyer, either for part of the price if the buyer pays a cash sum known as a "bundle", or for the whole price if there is no bundle. The notary also takes a sort of a mortgage known as "vendor’s lien" on the sold property, which allows the seller to recover his property in the event of non-payment of the annuity by the buyer. The buyer (called the annuitant) shall therefore pay his debt to the seller (the annuitant) through instalments (monthly, quarterly or others), one doesn’t know the figure in advance. The buyer pays the annuity to the seller until the latter's death.
Given this viewpoint, the sale in life annuity is a game of chance which can benefit either the seller, or the buyer, or be neutral. Everything depends on the seller’s life span.
The seller’s date of death, nobody can know and therefore represents a risk both for the seller who may die quickly and therefore not benefit much from the pension, and for the buyer who may have to pay the annuity longer than he had imagined if the seller lives for a long time. This risk, legally known as a "hazard" is mandatory in such a contract. The judge cancels the life annuity sale in which the hazard does not exist (for example: if the seller is ill on the day of the sale and dies quickly due to his illness, which means within 20 days following the signing of the act).
The potential heirs of the seller shall not inherit this property since it is sold. If you have children, you may find it useful to explain it to them. This decision mostly derives from the need to protect oneself and is at times poorly understood by the family circle. Do not hesitate to set an appointment with your notary before making any decision.
Buy in life annuity: maturity calculation
If the number of maturities is not known in advance, the amount of installments for the first year is set right from the beginning in the notarial act. It is calculated by taking into account:
- the value of the property sold,
- whether the property is free or occupied,
- the amount of any cash payment (the bundle),
- the age of the seller(s).
After which, the annuity is revised each year according to the variation in the cost of construction index, for most cases.
Sale in life annuity: taxation received from life annuity
Another index can be used under certain conditions. The annuity received each year by the seller will be subject to an income tax but not entirely. The taxable part of the life annuity depends on the age of the seller on the day of signing the notarial act. The older the seller, the less taxable his pension shall be.
- if the seller is under 50 on the day of the sale, 70% of the annuity will be taxable.
- if the seller is between 50 and 59 years old, 50% of the annuity will be taxable, between 60 and 69 years old, 40% of the annuity will be taxable.
- if the seller is 70 years of age or over, 30% of the annuity will be taxable.
Real estate capital gain, taxes, and life annuity sale
The system is the same as a regular sale and if you sell your main residence you will be totally exempt.
As soon as the sale has been signed at the notary, the property is no longer part of the seller's patrimony, who will no longer be fully responsible for it. The notarial act stipulates for those who will pay small and large works, property, and housing taxes
CERTIVIA: Management fund dedicated to life annuity
On September 9, 2014, Caisse des Depots launched the CERTIVIA fund, dedicated to the acquisition and management of real-estate life annuity, in association with the Superior Council of Notaries.