One of the principal rules of property investment is
that no property should cost more than it produces.
You obviously want to see the positive cash flow every month.
But from the tax management point of view, that is not the case.
When you are filing a tax return in March, you want to appear to be in red or break even.
The Japanese government in fact encourages investors to book the depreciation
that allows you post a deduction for the certain portion of the value of your property.
Tax code in Japan changes very frequently, almost every year.
I strongly advise that you should check with your broker or tax specialist
(tax accountant, CPA) before you take a significant action.
Tax is the biggest cost in the property investing.
Tax management therefore is a key for successful real estate investors.
Today I am going to discuss the taxes that investors need to pay when they
buy the real estate in Japan.
The following discussion is based on the tax laws which are applicable
as of end 2017.
(1) Stamp duty (Inshi-zei)
Stamp duty is applicable when you buy the property.
You need to pay at time of the contract closing (in other words,
you don’t need to pay the stamp duty annually) .In general, stamp duty is
applicable for various contracts such as commercial sales contracts when
buying and selling real estate, construction
contracts when building buildings, loan contracts when borrowing money from
financial institutions and also documents like commercial receipts.
-Who should pay stamp duty ?
The stamp duty shall be paid by a person who produced
the taxable document. Usually the cost of stamp duty is equally shared by the seller and the buyer.
-Method of paying stamp duty
The stamp duty will be paid to the tax office by actually putting income stamp on the taxable document
and usually cancelling it by your own Japanese Inkan (your name stamp).
You can buy these stamps at Japan Post offices.
-Real estate sales contract
The purchase and sale contract for real estate also falls under the stamp duty taxation document
and stamps in accordance with the contract amount must be affixed to the contract.
-Contract for construction contract
The construction contract also falls under the stamp duty taxation document and stamps in accordance with
the contract price must be affixed to the contract.
-Receipt
Commercial receipts and consulting fee fall under the stamp duty taxation document and stamps must
be affixed according to the receipt amount.
Regarding receipts made by ordinary individuals for transaction of real estate, stamp duty is
not charged regardless of the amount.
This is because receipts not related to commercial sales are not subject to stamp duties.
If you sell the property under the name of entity and produce the receipt for such transaction, you
are subject to the stamp duties.
-Stamp duty rate for the property transaction
These are based on the face value of the contract.
Those contracts exceeding 10 million yen and 10 million yen or less :10,000 yen (U$90@110)
Those exceeding 10 million yen and 50 million yen or less :20,000 yen
Those exceeding 50 million yen and 100 million yen or less :60,000 yen
Those exceeding 100 million yen and 500 million yen or less :100,000 yen
Those exceeding 500 million yen and 1 billion yen or less :200,000 yen etc.
In practice, your broker usually buy the appropriate amount of the duty stamp on your
behalf and charge the cost of stamp together with their brokerage.
(2) Registration license tax (Touroku-menkyo-zei)
Registration license tax is also only one-off payment when you first buy the property.
Registration license tax refers to the tax incurred when acquiring real estate or establishing
a company and registering.
When acquiring real estate, in order to clarify the types of tight of the real estate, registration of transfer of
ownership of land, registration of title and registration of preservation of ownership need to be registered with
the legal affair bureau for both land and building.
Please be advised that in Japanese laws, you need to register your title of the land and the building on the land
(typically houses) need to be registered separately. Title of the land and title of the building have separate title.
Also, when forming a mortgage loan, you will have to register such mortgage with
the legal affair bureau.
-Who should pay the registration license tax ?
A tax liability holder of a registration license tax is a person who register the real estate with the bureau.
When there are two or more people who register the property, these persons are obliged to jointly pay.
-Taxation base (taxable base) for registration license tax
The taxation base of the registration license tax on real estate is based on “the property tax
assessment value of the property” which is announced by the government every year.
-Rate of tax
(1) Registration of land ownership registration
Official value of the land x 0.2%
(2) Transfer of ownership of land by inheritance
Official value of the land x 0.4%
(2) Registration of Building (new building)
Official value of the building x 0.4%
(3) Transfer of ownership by trading
Official value of the building x 0.4%
(4) Transfer of ownership of the building by inheritance
Official value of the building x 0.4%
Official value of the properties is assessed and announced
by the government officials every year.
-Special measures of reduction rate for residential houses (but own use only)
Currently the following reduced tax rate is applied for residential houses for own use
and these reduced rates are applicable only till 2020.
Preservation of ownership of residential houses:0.15%
Registration transfer of ownership of residential houses:0.3%
Preservation registration of ownership of specified certification long-term superior housing etc.:0.1%
Saving registration of ownership of certified low carbon housing etc.:0.1%
Registration of the mortgage related to the loan :0.1%
In practice, when registering the title of the property, we usually ask certified
administrative scrivener to register.
You administrative scrivener will execute the registration practice at the Legal Affairs Bureau
on your behalf and will charge the investor with the tax paid and their fee after the contract is over.
The bureau does not have online registration system yet so someone must actually go to their office
to register.
(3) Real Estate Acquisition Tax (Fudousan-shutoku-zei)
Real estate acquisition tax is a tax imposed on people who acquired real estate for construction of houses or
purchase of land or houses. This tax is also one-off payment when you buy the property.
Real estate acquisition tax is imposed on both land and building(house).
Land refers to land such as rice field, field, residential land,mountain forest, etc.
A house is a building such as a house, a store, a factory, a warehouse, etc.
You are subject to the tax for both land and building.
– Who should pay the real estate acquisition tax ?
The person who acquired the lands and houses must pay the real estate acquisition tax.
– Tax calculation
The tax amount of the real estate acquisition tax is calculated according to the following formula.
Taxable base x tax rate = tax amount
Taxable base is announced by the government every year.
and usually it is about 70% of the actual market value.
– Special measures for real estate for housing.
In principle, it will be the price registered in the fixed asset tax registration which is announced by the
government every year.
However currently(as of end 2017), the tax office is offering special measures
to reduce taxable base to 1/2 of the land price, when acquiring real estate for housing from April 1,
2008 to March 31, 2018. This special measures only can be applied to houses for your own use and
therefore rental properties are not included.
-Tax rate
The standard tax rate of real estate acquisition tax is as follows.
Land 3%
House for own use 3%
offices 4%.
-Special measures for the secondhand houses
The government is currently offering the special measures of the tax break
for the buyers of secondhand houses (for your own use only, not applicable if you
don’t live there).
The amount corresponding to the newly built day of the acquired secondhand
house will be deducted from the acquisition tax you are imposed.
Year Built Allowance (deductible from your taxable base)
July 1, 1981 – June 30 of 1985 : 4.2 million yen
July 1, 1985 – March 31, 1989 : 4.5 million yen
April 1, 1989 – March 31, 1997 :10 million yen
after April 1, 1997 : 12 million yen (U$110,000@110)
In practice, the new owner of the property must report the acquisition to the local jurisdictions (prefecture level)
and then each local jurisdiction who is in charge of your location of the property will send
the new owner an invoice of acquisition tax after a few months of the acquisition.
There are some more special measures the government is offering for the limited time
to promote the real estate business but these are key points you need to know.
As you can see, the Japanese tax law is very complex and
even tax specialists can be confused.Your broker should be able to explain
the outline of the tax code and for details, you also need to check with
the tax accountant or CPA.
The above discussion only covers three taxes at time of buying property and
there are more taxes you need to pay after your investment.
I will discuss other taxes on this blog soon.
Toshihiko Yamamoto
Real estate investing consultant and author.
Toshihiko is currently writing a book about the real estate investing in Japan
for foreign investors.
Founder of Yamamoto Property Advisory in Tokyo.
International property Investment consultant and licensed
real estate broker (Japan).
He serves the foreign companies and individuals to buy and sell
the real estates in Japan as well as own homes.
He holds a Bachelor’s degree in Economics from
Osaka Prefecture University in Japan
and a MBA from Bond University in Australia.