Introduction
Real estate in Japan is acquired by foreigners for a wide range of purposes, including residential, rental investment, and business locations. However, it is not uncommon for individuals to only check whether they can purchase and not fully consider the tax procedures after acquisition. Japanese real estate involves not only taxes at the time of acquisition but also property tax during ownership, income tax on rental income, capital gains tax upon sale, and inheritance and gift taxes. For overseas residents, it is also important to appoint a tax withholding agent in Japan.
One point to understand here is that "foreigners" and "non-residents" are not the same concept. Even if one is a foreign national, if they have a primary residence in Japan, they can be considered a resident under Japanese income tax law. Conversely, even if one holds Japanese nationality, if they move their primary residence overseas, they may become a non-resident. In real estate taxation, the treatment varies not only by nationality but also by whether the owner is an individual or a corporation, whether they are a resident or non-resident of Japan, and whether the property is used for residential or business purposes.
This article will explain practical points in chronological order, focusing on cases where foreign individuals acquire, hold, rent, sell, or inherit real estate in Japan.
1. Real estate in Japan is subject to taxation in Japan
Even if a foreigner resides overseas, rental income from real estate located in Japan and profits from the sale of that real estate are generally considered domestic source income in Japan. Therefore, it is necessary to file or pay taxes not only in the owner's country of residence but also in Japan.
Even if there is a tax treaty between Japan and the owner's country of residence, many tax treaties recognize Japan, the country where the real estate is located, as having the right to tax real estate income and capital gains from real estate. Therefore, having a tax treaty does not necessarily mean that it will be tax-exempt in Japan. When the same income is subject to tax in the country of residence, double taxation is usually adjusted through foreign tax credits based on the domestic laws and tax treaties of that country.
Moreover, owning real estate in Japan and becoming a tax resident in Japan are separate issues. Simply purchasing real estate does not immediately make one a resident of Japan, and conversely, being a resident abroad does not exempt one from taxation on Japanese real estate.
2. Taxes incurred when acquiring real estate
When purchasing real estate, it is necessary to consider not only the purchase price but also stamp duty, registration and license tax, real estate acquisition tax, judicial scrivener fees, and brokerage fees. The real estate acquisition tax is a local tax imposed on those who acquire real estate through the purchase, gift, or construction of land or buildings, and is calculated based on the assessed value of fixed assets rather than the sale price. There are certain relief measures for residential properties and residential land, but the requirements regarding usage, floor area, age of the building, etc., must be individually confirmed.
The registration and license tax is imposed during the registration of ownership transfer or the establishment of a mortgage. If the sales contract is created on paper, the stamp duty corresponding to the stated amount will also be an issue. It is important to confirm the total investment amount, including various taxes at the time of acquisition, registration costs, and brokerage fees, rather than budgeting solely for the purchase funds.
The treatment of consumption tax is not uniform. The transfer of land is tax-exempt, but when a taxable business entity transfers a building as part of its business, the building portion is generally subject to consumption tax. On the other hand, if an individual sells their home not as a business, there may be cases where consumption tax does not apply to the building portion due to the seller's circumstances. For investment properties, the classification of land and building prices in the contract affects the acquisition cost, depreciation, and future capital gains and losses, so it is not appropriate to simply check the total amount.
When a foreigner with an address abroad becomes the registered owner, different registration documents from those of Japanese residents, such as an address certificate issued by a foreign public agency, may be required. It is advisable to confirm the necessary documents among judicial scriveners, brokerage companies, and tax professionals before concluding the sales contract, rather than proceeding with tax and registration separately.
3. Property tax and management during the holding period
Property tax is imposed on the owner as of January 1 each year, and depending on the region and property, urban planning tax may also be imposed. Property tax is calculated based on the price registered in the fixed asset tax ledger, not the actual purchase price or rental income for that year. Even if the property is vacant and not generating income, it is generally taxed as long as it is owned.
Some municipalities require overseas residents to have a notification address in Japan or a local tax payment manager. The tax payment manager for national taxes such as income tax and consumption tax differs from the tax payment manager for local taxes such as property tax and real estate acquisition tax, both in terms of the underlying system and the submission destination. Care must be taken not to assume that completing the procedures for national taxes also completes the procedures for local taxes.
Furthermore, overseas residents may face restrictions on opening and maintaining Japanese bank accounts and making overseas remittances. It is important to design a system that can actually operate after purchase, including the receipt of rent, payment of management fees, payment of property taxes, and management of repair reserves.
4. Rental income and 20.42% withholding tax
When a non-resident rents out real estate in Japan, that income is taxed as real estate income in Japan. Income is calculated by deducting management fees, repair costs, property taxes, insurance premiums, interest on loans, depreciation of buildings, and other necessary expenses from rental income, and generally requires filing a tax return. Land cannot be depreciated, and the principal repayment amount of loans is not considered a necessary expense, so cash flow and taxable income do not match.
Those who pay rent for real estate in Japan to non-residents will withhold 20.42% of the payment amount as a general rule. However, if an individual rents for their own or their relatives' residential use, withholding is not required for the rent paid by that individual. Therefore, even for the same residential property, the necessity of withholding may differ if a corporation rents it as company housing or if an individual rents it for business purposes.
This 20.42% is not the final tax rate on rental income. It is a withholding tax as an advance payment on the rent amount before deducting necessary expenses. When filing a tax return, if the actual taxable income and tax amount exceed the withheld tax amount, a refund may be received. Even if the management company remits the full rent overseas, the tenant may still have withholding obligations, so it should be clarified at the rental contract stage who will perform the withholding and payment.
Residential rentals are generally exempt from consumption tax, except in cases where the rental period is less than one month. On the other hand, the rental of buildings such as offices and stores may be a taxable transaction. Being a non-resident or foreigner does not automatically exempt one from consumption tax; the taxable sales amount, business classification, choice of taxable business, and necessity of invoice registration must be considered individually.
5. Tax Returns and Tax Agents
If a resident living abroad needs to file a tax return in Japan, it is customary to appoint a tax agent who has an address or residence in Japan and submit a "Notification of Appointment or Dismissal of Tax Agent for Income Tax and Consumption Tax" to the relevant tax office. The tax agent will act on behalf of the individual for submitting tax returns, paying taxes, receiving refunds, and receiving documents from the tax office. Both individuals and corporations can become tax agents, but it is necessary to choose someone who can continuously manage Japan's filing and payment practices, not just a simple mail receiver.
Income tax returns are generally filed between February 16 and March 15 of the year following the target year. The income deductions allowed for non-residents are more limited than for residents, so tax simulations for residents cannot be used directly. Additionally, documents such as the sales contract at the time of acquisition, price classification of land and buildings, registration and license tax, brokerage fees, loan-related documents, rental contracts, repair cost receipts, and withholding records are important to keep from the time of acquisition for future filings and capital gains calculations.
6. Capital Gains and 10.21% Withholding at the Time of Sale
When selling real estate in Japan, tax is levied on the capital gains calculated by deducting acquisition costs and transfer expenses from the sale price, not on the sale price itself. The acquisition cost of a building is calculated by deducting the equivalent amount of depreciation during the ownership period. Losing purchase documents can make it difficult to sufficiently prove acquisition costs, potentially increasing the tax burden.
The tax rate is classified into long-term and short-term capital gains based on whether the ownership period exceeds five years as of January 1 of the year of sale. It is important to note that it is not based on whether the period from the purchase date to the sale date exceeds five years. Additionally, certain exceptions can be considered for properties that were actually used for personal residence in Japan, but these do not automatically apply to investment properties of residents living abroad.
If the seller is a non-resident, the buyer will generally withhold 10.21% of the sale price. However, if the sale price is 100 million yen or less and the individual buyer purchases for their own or their relatives' residential use, withholding is not required. This determination is based on the transfer consideration and the buyer's intended use, not the seller's capital gains.
The 10.21% withholding is also not the final tax amount. If a loss occurs from the sale or if the actual capital gains tax amount is less than the withheld amount, a refund may be possible through a tax return. It is important to confirm acquisition cost documents, accumulated depreciation, sale expenses, and applicable exceptions before the sale, rather than starting preparation after the settlement of the sale price.
7. Exit Strategy Including Inheritance and Gifts
Land and buildings within Japan are considered domestic assets for Japanese inheritance and gift tax purposes. Therefore, even if the owners or heirs and donees are foreign residents living abroad, they may still be subject to Japanese inheritance or gift tax. The scope of taxable assets varies based on the address, nationality, past residency history in Japan, and residency status of the decedent, heirs, or donors and donees, but it is not necessarily the case that overseas residency exempts one from taxation on Japanese real estate.
The deadline for filing inheritance tax returns is generally within 10 months from the day after the date of knowledge of the commencement of inheritance. If there are overseas heirs, it may take time to gather documents equivalent to family registers, signature verification, estate division, tax payment funds, and inheritance registration in Japan. After April 2024, inheritance registration will be mandatory, and it will also apply to foreigners and overseas residents. It is necessary to consider not only the profitability during ownership but also who will inherit, with what funds the taxes will be paid, and in which country double taxation will be adjusted.
8. Things to Confirm in Advance from an International Tax Perspective
In the case of foreign investment in Japanese real estate, treating the purchase, rental, sale, and inheritance as independent procedures can lead to issues such as lack of documentation for acquisition costs, withholding tax omissions, missed refund claims, non-receipt of tax notifications, and double taxation in the country of residence. In particular, the choice between individual and corporate names should not be determined solely by income tax or corporate tax rates. It is necessary to compare factors including financing, profit remittance, consumption tax, management costs, taxation at the time of sale, inheritance and business succession, and taxation in the country of residence.
At MOCHIZUKI & Associates, we do not handle Japanese filings in isolation; we organize tax relations regarding Japanese real estate considering the owner's residence, tax treaties, flow of funds, property use, and future exit strategies. Please consult us from the stage before acquisition or execution of transactions regarding tax management for overseas residents, filing of rental income, verification of withholding tax, tax estimation before sale, and considerations regarding inheritance and gifts.
At MOCHIZUKI & Associates, we provide flexible support tailored to the circumstances of companies, ranging from accounting and tax assistance for foreign companies and foreign corporations entering Japan, to corporate tax and consumption tax filings, international tax matters, and tax advice on intercompany transactions, in languages such as Japanese, English, and Chinese.