Your Key To Passive Real Estate Income

How To Make Tax Free Money With Japanese Real Estate

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Imagine owning a luxury apartment for expats in Roppongi. You paid ¥100 million for it. Four years later, it has appreciated to ¥110 million thanks to higher demand (a foreign expat surge) and Tokyo’s rising land prices. You decide to sell, figuring on a ¥10 million profit. That’ll fund a nice Christmas vacation with your family. Christmas is only two weeks away.

Then you get hit with over ¥4.1 million in capital gains tax (CGT). That ¥10 million profit? Now a touch less than ¥5.9 million.

After this unexpected news, you turn the key in your car’s ignition. A certain familiar Beatles song plays on the radio:

tax-free money“Let me tell you how it will be! There’s one for you, 19 for me! ‘Cause I’m the taxman…”

”Should 5% appear too small, be thankful I don’t take it all! Cause I’m the taxman…”

 

You start driving. The radio taunts you:

 

 “If you drive a car, I’ll tax the street.”

 

It’s December. You can see your breath. You’re shivering, so you turn the knob on your dashboard.

 

“If you get too cold, I’ll tax the heat.”

 

Well, you eventually calmed down, and you got through the holiday season. Your family took that Hawaiian vacation. You’re back in Japan. It’s March 14, and you’re rushing to file your Blue Tax Form (青色申告, Ao Iro Shinkoku). You made ¥6 million in passive income from that apartment by renting it out to tenants, which was great, but—what?! You were in the 33% tax bracket for personal income tax?!

The taxman was cold to you this winter season. No, he didn’t take 95% like the one in the song, but he still took between 41 and 42% in CGT— that you’d probably like back. He also took 33% of the highest bracket of your income. You start some research, and there’s an ominous sinking feeling inside you. If only you’d known some legal tax reduction and tax avoidance strategies to generate tax-reduced or even tax-free money, you could’ve saved yourself literally millions of yen in taxes…

 

Reducing Taxes On Real Estate Investment

 

Capital Gains Tax (CGT)

CGT is assessed when you make a profit on selling an asset: not only real estate, but also stocks, works of art, etc. In the previous example, in which you bought a luxury apartment:

 

you sold it for ¥110,000,000 – you bought it for ¥100,000,000 = ¥10,000,000 in capital gains

Now, imagine selling it after four years:

¥10,000,000 in capital gains × (30% national CGT + 9% municipal CGT + 2.1% Tōhoku reconstruction tax)

= ¥10,000,000 in capital gains × 41.1% (various taxes combined) = ¥4,110,000 in CGT (!)

 

If only there were some other way… Actually, there is…

overseas investing japan tax-free money

 

¥10,000,000 in capital gains × 22.1% in the various taxes combined = ¥2,210,000 in CGT (much better, thanks)

How? How on earth did you save ¥1,900,000 in CGT? How did you reduce the tax rate, 41.1%22.1%?

 

Patience. Everything will become clear soon enough…

Income Tax

For you, Investor, real estate is just a passive income stream. You have a day job, too. Maybe you’re CEO of a medium-sized company, or maybe a highly-specialized IT professional creating the world’s most advanced electronic brain at your office in Minato Ward. Your income is ~¥10,000,000 per year. This puts you in the 33% tax bracket. The rental income you earn will also be in the 33% tax bracket, because both employment income and rental income are classified the same way on the Blue Tax Form. They’re both classified as “income” (給与, kyūyo), as opposed to other categories, e.g. “remuneration” (from being a contractor, for example), or income from forestry, fisheries, farming, etc. Can you reduce your taxable income, reduce taxes, even make tax-free money, and enjoy more of your employment AND rental income?

 

Reducing Taxes And Making Tax-Free Money In Japan


Capital Gains Tax (CGT) Reduction/Elimination Strategies

  1. Live there: If you can declare the property as your “primary residence,” then there is a ¥30,000,000 deduction.
  2. Wait to sell it:
    Once you’ve owned it for 5+ years (according to the taxman’s rules, so be careful), CGT drops like a stone.

    If you’ve owned the property for <5 years, then these taxes apply:

    30%
    national CGT

    9%
    municipal CGT

    2.1%
    Tōhoku reconstruction tax (until 2037, towards rebuilding the Northeast after the earthquake, tsunami, and nuclear meltdown)

    =
    41.1%

    However, if you have owned the property for 5+ years, then these taxes apply:

    low cost real estate investment tax-free money
    15% national CGT

    5%
    municipal CGT

    2.1%
    Tōhoku reconstruction tax

    =
    22.1%

 

Be careful. Just because you have owned the property for five years doesn’t mean the lower rate will apply. It’s based on how long you owned the property on January 1 of the year in which you sell it.

If you bought the property on July 1, 2015 and sell it on July 15 of 2020, it will only count as “four years.” Why? Because on 1/1/2020, it hadn’t yet been five full years.

Another thing to be careful about if having a new property built: the date you signed the contract/paid is not the date used to determine CGT. The date the construction finished is.

In other words, you can lower your CGT by -19% just by waiting. Who knows- it might appreciate even more…?

 

Income Tax Reduction/Elimination Strategies

 

  1. Deduct building depreciation on your Blue Tax Form. On the form, employment income/rental income fall under the same category. Therefore, a deduction based on your rental property can be used to lower ALL income tax, including from your day job.

    The government of Japan assumes the building is losing value. If, according to the government’s official tables, your building decreased by ¥1,000,000, you can deduct ¥1,000,000 on your taxes. Don’t worry—your building could still be in great condition (the government usually underestimates building lifespans). These deductions are based on a bureaucrat’s tables and assumptions, not the building’s actual condition. For a reinforced concrete building, the government assumes a 47-year lifespan. Whether it stays standing for 100 years doesn’t matter—you can still make heavy deductions on your taxes based on that building’s on-paper “depreciation.”

    If buying an old, fully-depreciated building, the clock resets—you can depreciate by 25% of the building’s value each year, knocking you down a few tax brackets. Maybe even avoid paying income tax altogether, and enjoy tax-free money.
  2. Declare “business expenses”. Once you’re letting your property, it’s a “business.” When you travel around town, that’s a tax write-off for “business travel”. Have lunch? “Business lunch”. Of course, the travel should be related to the investment property. The lunch should be with a (prospective) business associate, (prospective) client, etc. It’s based on the honour system. Charge your cashless Suica card with ¥20,000 at a time. Save the receipt. Provide them when you file your Blue Tax Form. Enjoy your reduced/eliminated personal income taxes (tax-free money).

Japan Tax Summary

Capital gains tax (CGT) in Japan is, compared to many other developed countries, very low. For instance, it’s over 21% higher in Denmark and over 13% higher in France. However, given the choice between 41.1% CGT and 22.1%, which would you rather pay? By postponing a sale, you can lower your CGT by millions of yen. Declare it as your main residence and eliminate CGT completely, as long as the capital gains were less than ¥30 million. There are numerous ways to reduce your yearly personal income taxes through real estate as well, through the skilful use of depreciation deductions and business expenses. Be tax aware, and you’ll end up ahead financially.

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