ISF and Capital Gains: When Disposal Gains Increase the Wealth Tax

Imagine: you own a second home in Argelès-sur-Mer, and you also have a well-performing stock portfolio. This year, you sold some of your shares to finance renovations. You think your capital gains (profits made when selling shares or assets) only affect income tax. But then the tax authorities demand an additional ISF (solidarity tax on wealth, replaced since 2018 by the IFI, real estate wealth tax) on the grounds that these capital gains must be taken into account in the calculation of the ISF cap. How is this possible? This is the question raised by the French Supreme Court decision of 7 July 2009.

This decision answers a crucial question for taxpayers subject to ISF: should net gains on the disposal of securities (shares, bonds, etc.) be included in the income used to calculate the ISF cap? The cap is a mechanism that limits the total amount of direct taxes (ISF + income tax) to 85% of the year's income. If your taxes exceed this threshold, you can claim a reduction. But if the tax authorities include capital gains in income, this may reduce the benefit of the cap or even eliminate it.

In this decision, the Supreme Court ruled in favour of the tax authorities: yes, net gains on the disposal of securities form part of the income to be taken into account for the ISF cap. It held that these gains constitute a component of taxable income, even if they are realised exceptionally. In other words, selling shares also represents a contributory capacity (ability to pay tax) that must be considered.

The facts: a story like many others

Mr X, a taxpayer residing in Argelès-sur-Mer, owned real estate and a portfolio of securities. In 2001, he realised capital gains on the sale of shares amounting to €173,682. He declared these gains for income tax purposes, but he did not think they would affect his ISF. However, during a tax audit, the tax authorities included these capital gains in the calculation of his income for the purpose of the ISF cap. As a result, the cap was lower, and Mr X had to pay an additional ISF of several thousand euros.

Mr X challenged this adjustment before the court and then on appeal. His main argument: capital gains on disposals are not regular income but exceptional capital gains. He argued that taking them into account for the ISF cap amounted to taxing the same gain twice (once for income tax, once via ISF). He also relied on a decision of the Droit de préemption urbain : que faire si le vendeur refuse mon prix ?">Constitutional Council of 29 December 1998, which had validated the principle of the cap but without expressly ruling on the inclusion of capital gains.

The court of appeal rejected his arguments and upheld the adjustment. Mr X then appealed to the Supreme Court. The High Court had to decide: should capital gains on disposals be included in income for the calculation of the ISF cap?

The court's reasoning — explained

The Supreme Court first recalls the principle: ISF is a tax on wealth (all assets and rights held), but its cap is calculated based on income. Under Article 885 V bis of the General Tax Code (CGI) then in force, the ISF cap must not deprive the taxpayer of more than 85% of their income. The concept of "income" includes all categories of income taxable to income tax, including net gains on the disposal of securities.

However, the Court specifies that this is not double taxation. ISF taxes wealth, income tax taxes gains. Capital gains increase the taxpayer's contributory capacity, so it is logical that they are taken into account in the cap. Otherwise, a taxpayer could, by selling securities, artificially reduce their overall tax rate.

The Court also dismisses the argument based on the Constitutional Council decision. It considers that this decision does not prohibit taking disposal gains into account to assess contributory capacity. In short, the Constitutional Council validated the cap mechanism but did not limit the definition of income.

What few people know is that this position has been consistent since an earlier decision of 2004 (Com., 15 June 2004, n°02-19.418). The 2009 decision therefore merely confirms a well-established case law. The judges did not innovate; they simply reaffirmed a principle: capital gains are income for the purposes of the ISF cap.

What this means for you — in practice

If you own significant wealth (real estate + securities) and you realise capital gains on disposals, you should know that these gains may increase your ISF (or today your IFI) by reducing the benefit of the cap. For example, take a couple living in Le Barcarès, with taxable wealth of €2.5 million (main residence, rental apartments, stock portfolio). In 2023, they sell shares realising €200,000 in capital gains. Without this sale, their ISF/IFI would be capped at, say, €10,000. But with the capital gain included in income, the cap is less favourable, and the tax increases to €12,000. That is an additional €2,000.

If you are a real estate professional (agent, developer), you should advise your clients to check the impact of securities disposals on their ISF/IFI. Many mistakenly think that only rental or salary income counts.

Since the abolition of ISF and its replacement by the IFI (real estate wealth tax) in 2018, the issue arises differently. IFI only concerns real estate assets. But the IFI cap (Article 974 of the CGI) works on the same principle: it is calculated based on income. Therefore, if you realise real estate capital gains (sale of a property), these could be taken into account in income for the IFI cap. The 2009 case law therefore remains relevant for IFI.

If you are in this situation, you must: declare all your capital gains (securities or real estate) in your income tax return, and include them in the calculation of the ISF/IFI cap. If in doubt, ask a tax lawyer to simulate the impact before selling.

Four tips to avoid this type of dispute

• Anticipate the tax impact before any significant disposal: Before selling shares or real estate, carry out a comprehensive simulation of your wealth tax (ISF/IFI) and income tax. An online tool or an accountant can help. For example, if you plan to sell a stock portfolio to finance the purchase of a home in Argelès-sur-Mer, first calculate the impact on your cap.
• Keep all supporting documents for your gains and losses: In the event of an audit, you will need to prove the amount of gains. Keep bank statements, stock trading orders, sale deeds. This will also allow you to deduct any losses (losses) that could offset gains.
• Spontaneously declare capital gains in your income tax return: Do not forget them, even if you think they are not taxable (e.g., sale of shares held for more than 8 years with allowance). The tax authorities may include them automatically.
• Consult a tax lawyer before challenging an adjustment: If the tax authorities demand additional tax, do not respond alone. A specialised lawyer can check whether the calculation is correct and whether substantive arguments (such as lack of contributory capacity) can be raised.

Further reading: related case law and developments

The decision of 7 July 2009 is part of a consistent line. Already, in a decision of 15 June 2004 (n°02-19.418), the Supreme Court had ruled that capital gains on disposals must be included in income for the ISF cap. The 2009 decision merely confirms this. More recently, for IFI, the Conseil d'État had the opportunity to rule on the concept of income for the cap. In a decision of 20 November 2020 (n°432277), it held that rental income (rents) and real estate capital gains must be taken into account. The trend is therefore clear: the tax authorities and judges consider that any increase in contributory capacity, even exceptional, must be included.

What this means for the future: if you hold mixed wealth (real estate and financial assets), disposals of shares or real estate may affect your wealth tax. With IFI, the risk is lower because only real estate assets are taxed, but real estate capital gains are indeed taken into account in income for the cap. It is therefore essential to plan your disposals according to your overall tax situation.

Frequently asked questions

1. Are capital gains on the sale of securities taxable for ISF? No, ISF (or IFI) is a tax on wealth held on 1 January, not on disposals. However, they are taken into account in the calculation of the ISF/IFI cap, which may increase the tax due.

2. Can I deduct capital losses to reduce my ISF? Losses reduce your income tax (by offsetting them against gains of the same nature), but they do not directly reduce your ISF/IFI. However, if they reduce your overall income, they may indirectly improve the cap.

3. What is the deadline to challenge an adjustment relating to the inclusion of capital gains in the cap? You have two months from receipt of the notice of assessment to file a claim. After this period, you can take the matter to court within two years of the assessment.

4. Does this case law apply to IFI? Yes, by analogy, because the IFI cap mechanism is similar to that of ISF. Real estate capital gains (sale of a property) are taken into account in income for the IFI cap.

5. What if I have already sold shares and fear an adjustment? You can file a voluntary corrective return to regularise your situation. This may reduce penalties. Then consult a lawyer to assess your exposure.

Are you in a similar situation? A 30-minute initial consultation with Maître Zakine (€45) could save you months of proceedings — and often much more. Book an appointment →