Tax Requirements

The information on this page is intended as a guide to the aspects of Japan taxation that need to be considered by Japan real estate investors.

Real estate acquisition tax is imposed on the acquisition of land or buildings in Japan when individuals or corporations who have acquired land or buildings through purchase, gift, exchange, or construction (including enlargement and remodeling) regardless of whether the acquisition was paid for or registered. An acquisition through inheritance is not assessed. A notification of tax due is sent from the local tax office about 3 months after the acquisition.
The tax base is the assessed value by the government based on registered council records rather than the purchase price. The buyer can find out the assessed value of the property from the valuation certificate issued by the local government through the seller. Government valuations tend to lag market valuations, it could by as much as 50% in some parts of Japan. The tax rate is 4% but is reduced to 3% in the case of an acquisition of residential property. From April 1, 2012, the rate 4% will apply to both residential and non-residential property.

Consumption tax is VAT and levied by the national government and prefecture on the transfer of goods or services in Japan. The tax base is the consideration of the transfer of goods or services. The rate is 5% (4% national and 1% prefecture).
Often the consumption tax is included in the price of the building (but not included in the price of the land. The transfer or lease of land, or rights to land is exempt from consumption tax.

A registration tax is levied when an entry is made in the official registry with regard to property rights. Based on the fixed assessed valuation from the government, the tax amount is 1.3% of the assessed value of the land, and 2% of the assessed value of the building. The 0.3% rate is applicable for building when individuals purchase certain second hand housing as their own residence. The registration tax for newly built housing is 0.4% of the assessed value of the building. The 0.15% rate is applicable when individuals purchase certain newly built housing as their own residence.

A stamp duty is imposed when the buyer signs a sales agreement. The amount of stamp duty varies with the price of the real estate.

Real estate tax is payable by the owner as of January 1 each year. The settlement statement you get at closing generally explains how  the real estate taxes are apportioned between the seller and  buyer. The  buyer should be charged for the portion from the date of closing to the end of  the real property tax year.

Fixed assets tax on the depreciable property is levied by the local government where the property is located. This tax is payable by the individual who is registered as the owner of the real estate as of January 1 each year. The payment must be made in accordance with the notification of payment schedule that is sent to the owner.
The tax rate is 1.4% of the assessed value of fixed assets, which is determined and revised every three years.

City planning tax is levied on individuals who are registered as owners of real estate in areas designated for urbanization under the City Planning Law. This tax is levied by the metropolitan government for the 23 wards of Tokyo. Tax payment must be made in accordance with the notification of payment schedule that is sent to the owner. The tax base is the same as fixed assets tax but the rate is 0.3%. It is collected in conjunction with fixed assets tax.

When computing rental income a deduction is available for the depreciation of buildings. The acquisition cost of buildings is depreciated over their useful life as stipulated by government regulations. These useful lives can range from 7 to 50 years depending on the structure.

Rental income is subject to corporation tax in the same manner as ordinary business income. The effective tax rate after aggregating of corporation tax, enterprise tax and inhabitant taxes is 40.69%.
Japan considered as a high-tax jurisdiction but tax cost on real estate investment can be kept at a lower level with careful planning and the investment vehicle that best suits the investor(s). Click here to learn more about the different investment vehicles used for Japan real estate investment.

Rental income is classified as real estate income. If a lessor has 10 or more rooms or 5 or more houses, his or her real estate income is basically treated in the same manner as business income. If the scale is smaller than the above, a casualty loss on assets can only be subtracted within the real estate income.
Related expenses such as depreciation and interest on loans are deductible from real estate income. When a loss arises in computing real estate income, it can be offset against other income except for a loss on assets made by small-scale landlords. However the portion of the loss relating to interest expense on a loan obtained for purchasing the land cannot be offset against other income.

A non-resident or a foreign corporation is taxed in the same manner as a resident or a domestic corporation except for the following points:

Withholding tax
Rental income earned by a non-resident or a foreign corporation is subject to withholding tax at 20%. The taxpayer can claim a credit against the final tax liability in its tax return for the withholding tax paid. When the withholding tax amount is larger than the final tax liability amount the excess can be refunded.

Local tax
When a non-resident or a foreign corporation does not have domicile or PE in Japan, local taxes (Inhabitant taxes and Enterprise tax) are not levied on its income.

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