The Japanese tax system allows taxpayers to reduce their taxes with deductions. This allows them to save more money for the things that matter. For example, imagine that your income is ¥10,000,000 (the 33% tax bracket). Normally, with no deductions, if you make ¥10,000, you will pay ¥3,300 tax on it:
¥10,000 × 33% = ¥3,300
Enter deductions. Imagine that you make ¥10,000, and declare a ¥9,000 deduction:
(¥10,000 – ¥9,000) × 33% = ¥330 ← Taxes now, versus the ¥3,300 from before
Great— but what counts as a deduction? Well, many things count, for example, business expenses. In the example, that ¥9,000 could have been a tablet computer, or a business dinner.
Why is this? From the government’s perspective, deductions are “losses”. Yes, you made ¥10,000,000 this year in revenue. However, when you bought that tablet computer or paid for that business dinner with a client, it cost you. You took a loss. Your net income (basically “profit”) was not really ¥10,000,000. It was OFFSET to ¥9,999,100. Taxes are calculated on net income, not revenue.
Note that those who take advantage of such deductions usually use the tax office’s Blue Tax Form (青色申告, Ao Iro Shinkoku). It has several income categories, and deductions must be in the same category as the type of income for which the taxpayer wants to reduce taxes. The government considers employment income “salary” (給与, kyūyo), whereas it considers freelance earnings “remuneration” (報酬, hōshū). These are the main categories; although there are other categories, as well, unless you don protective clothing and pick up a chainsaw every morning, chances are you will not concern yourself too much with “forestry” or other categories.
On the Blue Tax Form, you cannot mix and match income from one category with income from another, unfortunately for the taxpayer (but very fortunately for the Japanese government). Therefore, for example, if you are full-time in IT with a side hustle teaching English to private students, which of course you carefully and lawfully declare on your taxes, you cannot deduct an English textbook (a “remuneration” deduction) from your main “salary” (e.g, from IT work). Good news, though: they classify rental income as “salary”. Therefore, not only can your deductions from real estate lower taxes on your rental income, they can also lower your day job’s income taxes.
Deductible Fees And Expenses For Real Estate Investors
Sure, it’s wonderful that you can deduct a computer/business dinner, but what about real estate? Deductions include:
- Insurance (fire, earthquake, etc.)
- Real estate agency monthly management fees (the percentage they take from your monthly rental income in exchange for dealing with the tenant on your behalf—typically 5~10%)
- Placement commissions (when finding a new tenant—typically one month’s rent)
- Repairs, refurbishment, and mortgage interest: Imagine that your vintage 1982 fuse box is in need of replacement. You can write this off on your taxes. Remodelling? Write it off. That 1.5% mortgage interest you pay each year on a ¥20,000,000 building? That’s ¥300,000 deductible!
Travel Expenses And Your Suica card
Once you receive rental income from tenants, you are a “business” and can deduct business expenses, including travel expenses. Just get a receipt for each charge of your Suica card (the one from the kiosk in the train station will do, the item-by-item receipt is unnecessary) and you can deduct Suica card charges using the Blue Tax Form as “travel expenses”. In addition to its use for train fares/commuter passes, the Suica card can be used to buy practically anything at many businesses, including 7-Eleven, Family Mart, even Don Quijote (anything from groceries to home appliances to a three-person inflatable rowboat). As long as the Suica card charges are not too outlandish, tax officials typically do not look too closely at what the Suica card was used to buy…
The Reason High Net Worth And Higher Tax Bracket Individuals Choose Real Estate
“Depreciation” might sound negative, evoking images of financial loss, but actually, it can be used to save a taxpayer millions, and the taxpayer might not actually lose anything, in reality. Basically, depreciation is when an asset becomes worth less than before.
The Japanese government assumes that, due to earthquakes, normal wear and tear, etc., your concrete building will last for 47 years, your brick building, 38 years, and your wooden building, 22 years, then be demolished (or so they think). The government allows you to make a deduction every year for “depreciation”. However, in reality, you could be the owner of a pristine 47-year-old building; it might stand for another 47 years! The government doesn’t care. They’ll just look at their table on a piece of paper and declare “The building decreased in value by 1/47th this year”.
Imagine buying a concrete building worth ¥20,000,000. It’s used and has 20 years’ depreciation left on it, according to the government, because it’s already 27 years old. For the next 20 years, it will depreciate by ¥1,000,000. Now imagine that your tenants are paying ¥1,000,000 per year in rent. The two numbers will completely cancel each other out. You will pay nothing at all in income tax for that building.
Reduce Your Taxes By Large Amounts Over A Short Period Of Time
Once fully depreciated, if the building is sold to a new owner, the depreciation starts again, on an accelerated schedule. Suppose you buy an old wooden house worth ¥10,000,000 (not including the value of the land [no depreciation]), already, say, 30 years old (fully depreciated). However, when you buy it, a new, four-year depreciation schedule starts. For the next four years, you can write off ¥2,500,000 from your income tax for that building. This affects not only rental income, but income from your day job, too; if in the 45% tax bracket, that would be a savings of ¥1,125,000 yen on your tax bill for the next four years.
In an incredible loophole, this doesn’t just apply to buildings in Japan. If you are a “permanent resident for tax purposes” (i.e. you have earned an income in Japan for 5+ years out of the past ten, regardless of visa), then you can do this with overseas property, as well. Buy Lincoln’s old log cabin, a half-timbered house in Germany, etc. and declare the depreciation on your Blue Tax Form, even though that building could still be standing hundreds of years from now.
Note: The government has scheduled the closure of this loophole for 2021.
How To Reduce Your Taxes With Japanese Real Estate: Summary
There are numerous deductions usually based on perceived “losses” (even if said taxpayer really lost nothing). These can lower income tax greatly. Rental income, employment income from working, and real estate deductions are all in the same tax category on the Blue Tax Form, so not only can one reduce taxes paid on rental income, one can reduce total taxes, including taxes from one’s profession, whether that is programmer, Manager, CEO, university lecturer, etc. Tax deductions from perceived “depreciation” of your property (which could actually be in great shape) will greatly lower your taxes, as can payments for insurance, real estate agency monthly management fees/placement commissions, travel expenses, maintenance/repairs/refurbishment, and mortgage interest.