Takashi Yamaguchi, English Speaking Japanese Tax Accountant
Tel/Fax : 03-6312-3320
営業時間 : 9:00 - 18:00 (月~金)

Japanese taxation on real estate investment

Now more and more foreigners become residents and owners of real estate of Japan as they become to like this country.
I take it as a good news but it can be a bit annoying in terms of taxes.
Today, I will talk about Japanese taxation when foreigners invest in Japanese real estate.

Tax on funding

In the case of foreigners living in Japan, a taxation may be triggered by remittance of funds to purchase a property.
A foreigner (more precisely, an individual who is not a Japanese national) who lives in Japan is taxed as a “non-permanent resident” for the initial 5-years for the Japanese income tax purpose.
The non-permanent resident enjoys a privilege that his/her income earned outside Japan (i.e., foreign source income) is not subject to Japanese income tax unless it is remitted to the country.
However, he/her will be taxed in Japan at the timing of remittance of funds from the foreign account for the real estate investment. It may attract unexpected taxation in Japan.
A probable case is where you are living in Japan and leasing/have sold your home left in the home country. If you have pooled money of the rent or sales consideration in a foreign bank account then remit it to Japan, the remitted amount (or either smaller of the amount of foreign source income of the year) is regarded as an income for the Japanese income tax purpose.
If the remitted amount is exactly same to the investment amount, additional remittances may be necessary due to the unexpected taxation or you may have to cancel the investment in the worst case.

Tax on making investment

Real estate acquisition tax

The 4% tax burden on acquisition of real estate could impose significant impact on the return on investment.
Although there are tax relief measures for residential property, it does not apply to investment/business properties.
The tax base amount is not simply the acquisition cost but assessed by the municipality.

Consumption tax

The purchase price for a building portion is taxed at 8% (10% after October 1, 2019).
This consumption tax can be credited from your consumption tax liability provided that the building is going to be used as a store/an office.
However, if you are not registered as taxpayer in advance for the consumption tax purpose, there is no chance for claiming the tax credit.
It is kind of a dangerous pitfall not only for foreign investors but also Japanese such as a company worker who is not familiar with the consumption tax return filing.

Property tax and city planning tax

An owner of real estate as of January 1 of every year will be the taxpayer. However, it is the common practice in Japan that a seller charges prorated amount of these taxes to the buyer based on the period from buy/sell date to December 31 of the year.
The tax rate is 1.4% and 0.3% for the property tax and city planning tax respectively.
The tax base is not the buy/sell amount of the property but assessed amount by the municipality.

Tax on investment income

Income tax

If you lease the property, your lease income will be taxed as a “real estate income” for the Japanese income tax purpose. If you sell it and make profit, the profit is taxed as a capital gain.

Real estate income

Real estate income, together with other income, is taxed at a progressive rate of 15 to 55% (including local taxes).
For the calculation of real estate income, you can claim deduction for the depreciation of the building.
However, the depreciation is only deductible while the building is being used for business or lease. Accordingly, you cannot claim the deduction of the depreciation for a property not actually used for the business, for instance purchased for speculation or under construction/renovation.
Some realtors/investment advisers do not inform of the aforesaid tax implication with their client though they compute the investment return after tax assuming that depreciation is deductible since immediately inception of investment.
I was contacted by an investor who bought the property at the very end of the 2018.
Despite the fact the property is not available for the business as the renovation is still underway, he believed that he can enjoy tax benefit of depreciation from that year.
Probably he had made the investment decision relying on the wrong information.

Capital gain

The capital gain is taxed at a rate of 20.315% (for real estate holdings of more than five years) or 39.63% (for less than five years).
Because it is taxed independently from the other incomes, it cannot be offset with losses incurred in the other income categories (and vice versa).
Besides, if you had to sell the property in five years after the investment despite original plan was long-term holding, capital gain tax may become double.

Consumption tax

Rent income of residential property is exempted but leasing of business occupancy such as a store and office is taxable.
Before you commence real estate leasing, you would better to study tax implications including the consumption tax imposed on the initial investment.
The higher the property price, the greater the difference in tax burden due to differences in tax application in advance.
In addition, the sale of the building is subject to consumption tax regardless of purpose of the property, i.e., residential or commercial.
This affects not only the consumption tax liability for that year when you need to file the consumption tax return but also a judgmental factor on whether you need to file the tax return in the year following the years (taxable sales in the base period).
So, you should consider that impact carefully when you are supposed to keep doing taxable business in Japan even after the sale of the real estate.

Taxation after leaving Japan

The incomes derived from real estate is taxed in Japan even after you leave Japan and become a “non-resident”.
Accordingly, before leaving Japan, you should appoint someone as a “tax proxy” who files your tax return and pay your taxes on behalf of you after leaving Japan.

Income tax

Real estate income

As same to a resident, income tax filing is required in Japan.
However, as the local tax (10%) will not be taxed on non-residents applicable progressive tax rate becomes 5 to 45%.

Capital gain

It is necessary to declare capital gain tax in Japan.
Applicable tax rate to the capital gain earned by non-residents is 15.315% (if the ownership period of the real estate is more than 5 years) or 30.63% (if less than 5 years).

Withholding income tax

The rent is subject to a 20.42% withholding tax upon its payment.
The consideration for sale of real estate (not the amount of capital gain) is also subject to a 10.21% withholding tax upon payment.
You can credit the withholding taxes amount from annual income tax liability by filing the income tax return.

Consumption tax

Even if the owner becomes a non-resident, the tax consequence of the Japanese consumption tax does not change.
As long as you are a taxpayer of the consumption tax, you need to file a tax return even after you leave the country.

Property tax and city planning tax

Even if the owner is a non-resident, taxation is not exempted.

 

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How did you think of it?
You are tired with too many taxes ….?
Hope you still remain living in and loving Japan.

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