Click here to Take Me Back To Part One to find out how the system works…
Previously, we learned that by law, those who live and work in Japan must join government insurance schemes. Most employees get ”Social Insurance”, which includes Health Insurance and Pension. Social Insurance is a fixed percentage and comes out of the employee’s base salary. Generally, this is preferable to the alternative, which is taking out National Health Insurance and National Pension separately. This is because, first of all, employees shoulder 100% of the costs with National Health Insurance/Pension. Whereas with Social Insurance, the employer assumes 50% of the burden. Second of all, benefits are less. However, certain legal loopholes allow many companies to get out of paying Social Insurance. Self-employed and contractors are on National Health Insurance/Pension by default. Finally, a few employees eligible for Social Insurance opt out for various reasons; they join National Health Insurance and Pension. So how do you reduce your premiums or even get payment exemptions?
Members of Social Insurance can’t reduce their premiums because the premiums are based on their monthly salary. However, members of National Health Insurance and National Pension can reduce what they pay. This is because the government bases National Health Insurance premiums on the previous year’s taxable income. The previous year’s taxable income has a more complicated relationship with the something called the “limit certificate” (which we will define later), and National Pension exemptions.
Introducing: The Real Estate Investment Hack
The key to reducing, or even receiving exemptions from, National Health Insurance and National Pension, is to lower one’s taxable income. One accomplishes this through deductions. For example, if someone has many dependants (e.g. children), he/she may claim deductions for them. What about real estate? How can real estate help you lower your taxable income, so you can save money on National Health Insurance/Pension?
Well, the answer is that once you’re renting out your property, it’s a business. Any losses incurred can be written off on your taxes as “business expenses/losses” to lower your taxable income. For example, here are some common deductions:
- Building depreciation
Imagine you just bought a 30-year-old wooden building for ¥10 million. It has a four-year accelerated depreciation schedule. In other words, the tax code says that it’ll be ‘worthless’ four years from now. You can therefore write off ¥2.5 million per year for the next four years. This will significantly lower your taxable income. In turn, it will reduce the amount you have to pay for National Health Insurance and National Pension. The building might actually stand for decades more, but that doesn’t matter to the pencil pushers in the government.
- Maintenance and repairs
Did you spend ¥1 million for a new roof for your building? That’s a ¥1 million deduction.
- Business expenses
Did you travel to meet a prospective property manager, or have lunch with him/her? Business travel, business lunch—save the receipts, write them off as business expenses.
- Mortgage interest
Do you pay ¥2 million a year in mortgage interest? You can write ¥2 million off on your taxes and your new, taxable income will be ¥2 million lower.
Reduce National Health Insurance Premiums
The government bases National Health Insurance premiums on the previous year’s income. Perhaps you have the experience of living and working in Japan before. Remember how, in your first year, National Health Insurance was very inexpensive, but costs shot up in the second year? It was because the government had no income on which to base the premiums, so they ended up being cheap. What if you could recapture those days by using real-estate-based deductions? Good news- you can.
Although the name might indicate otherwise, each municipality implements “National Health Insurance” slightly differently. Premiums differ, usually slightly, depending on which ward, city, town, etc. However, on average, someone earning ¥3 million would pay ¥123,810. A ¥4-million-a-year income earner, by contrast, would pay ¥167,470. This is a difference of ¥43,660. If you earn ¥4 million and deduct ¥1 million for depreciation, maintenance/repairs, business expenses, mortgage interest, etc… …you could lower your premiums by -43,660 per year.
Another Way To Decrease Your Healthcare Costs Using Real Estate: “The Limit Certificate”
In Japan, there is a document called a “limit certificate” (限度額認定証, Gendogakuninteishō). Basically it’s a piece of paper that limits how much you have to spend on healthcare each month. For example, imagine you have a “limit certificate” for ¥82,000. Then, one month, you have hernia surgery for ¥100,000. You’ll only have to pay ¥82,000; the government will foot the rest of the bill. The lower your income, the lower the limit on the limit certificate will be. ¥82,000 is if one has an income of ¥250,000~¥300,000 per month. If one lowers one’s income below ¥250,000 using real-estate based deductions, a limit certificate below ¥82,000 may be possible. In other words, it means that if you can decrease your taxable income, you can apply for a better limit certificate.
Exemption From National Pension
Maybe you want to lower or even fully exempt yourself from National Pension. Well, according to nenkin.go.jp, the Japanese government website about National Pension, “You may also be exempt from contribution payments if the previous year’s income of you/your spouse/your home owner is low, and if your application for exemption is granted”. That is, if your taxable income is ¥1.58 million or less. Once you cross south of the ¥1.58 million line, you may apply for (but not necessarily receive) a quarter, half, three-quarters, or even full exemption from National Pension. The official term for this is Kokumin Nenkin Hokenryō no Menjo (国民年金保険料の免除).
What Are The Limits?
What Can You Reduce (Or Eliminate) Using Your Real Estate-Based Expenses?
- National Health Insurance
You can lower the premiums by lowering your taxable income.
- Limit Certificate
You can get a limit certificate, limiting your maximum spend for treatment, by lowering your taxable income.
- National Pension
Can you lower your taxable income to ¥1.58 million or less? If so, you can apply to the Japan Pension Service (年金機構, Nenkin Kikō) for an exemption to National Pension payments. One limit to this, however, is that the less you pay in, the less you can receive. Be honest about your own personal financial discipline and knowledge. Ask yourself “Who do I trust more with this money that I may or may not pay to the Japan Pension Service? Myself, or the government?”
What Can’t You Reduce (Or Eliminate)?
Social Insurance premiums are a set percentage of your base salary. You cannot reduce or eliminate them using real estate-based tax deductions to lower your taxable income.
How To Reduce Your Health Insurance Or Pension Premiums in Japan: Conclusion
You can use real estate to lower your taxable income. If currently renting out, you can do this with depreciation, maintenance/repairs, business expenses, writing off your mortgage interest, etc. This can lower your National Health Insurance premiums and the amount on your limit certificate for healthcare. Furthermore, if you can lower your taxable income low enough (¥1.58 million), you can apply for a National Pension exemption. However, there is not much that members of Social Insurance can do to reduce their costs.