Tax Deduction Guide For Home Owners
We’re going to make some “foolish assumptions” about you. We’re going to assume that you live in Japan. We’re going to assume that you’re working, or at least receiving some kind of income in Japan. We’re going to assume that maybe, just maybe, you wish your Japanese taxes (income tax and resident’s tax) were lower. Finally, we’re going to assume that you either own real estate, or are at least thinking about it. Well, Honorable Home Owner-San, here’s your tax deduction guide: how to lower your taxes through Japanese real estate.
Ten Years Of Tax Deductions Through Your Mortgage
You can make tax deductions on your income tax and resident’s tax for ten years if you have a mortgage. This system has been around for a while. It only applies to new homes, though, and only up to ¥40 million (maximum deduction: ¥400,000 per year).
In the tax deduction system, you may deduct 1% of your total end-of-year outstanding mortgage balance. For example, imagine a man named James, who has a home he purchased for ¥20 million (a number we’ll ignore for now, but use later). He currently owes ¥11 million for it. How much can he deduct from his taxes?
¥11 million outstanding mortgage balance × 1% = ¥110,000 in deductions per year
If he’s in the highest tax bracket, with 45% taxes:
¥110,000 in deductions per year × 45% marginal tax rate = ¥49,500 he saves per year
However, The Numbers Increase To ¥50 Million Maximum Mortgage From Which You Can Deduct→¥500,000 Maximum Tax Deduction If…
…it’s “Long-Term Excellent Housing.” In Japanese, this is 長期優良住宅 (Chōki Yūryō Jūtaku). Or if it’s Low-Carbon Housing (低炭素住宅, Tei-Tanso Jūtaku). Kill two birds with one stone: save money while saving the planet, too!
What Happens Beyond Year 10? Enter The New Tax Deductions!
Under the administration of Prime Minister Abe, there are now even more deductions available. Now, home owners can declare deductions for three additional years, to make 13 total. However, from Year 11, the rules are different from Years 1-10.
From Year 11 to Year 13, home owners may take the lower of the following two deductions:
The outstanding balance of the loan × 1%, as with before
The property’s purchase price × ⅔% (two-thirds of a percent) (up to ¥40 million, same as above)
James’ Story, Revisited: Using A Different Tax Deduction System
James purchased his home for ¥20 million, and is now doing taxes for his 11th year. The outstanding mortgage balance as of December 31 in the previous year was ¥10 million. How much will James be able to deduct?
Well, using the calculations from #1:
¥10 million (the outstanding balance of the loan) × 1% = ¥100,000 that James can deduct from his taxes
However, using the calculations from #2:
¥20 million (the purchase price) × ⅔% = ¥133,333 that James can deduct from his taxes
¥100,000 is less than ¥133,333; as much as James may wish he could deduct ¥133,333, he can’t. He ends up deducting ¥100,000.
A Comparison Of James And His Friend, Semaj
One morning, James is sitting on a floor chair, in his tatami room, sipping green tea and reading Yomiuri Shimbun, while intermittently gazing out the window at Mt. Fuji, when suddenly, someone rings the doorbell. It’s his friend, Semaj. Semaj also lives in Japan. He also owns a home in Japan, and is also in his 11th year of repayments. Like James’ home, he purchased his for ¥20 million. However, he can deduct ¥133,333 from his taxes instead of ¥100,000. How is he able to do that?
Then, it all becomes clear. In Semaj’s financial situation, although Semaj’s home is also ¥20 million, just like James’, he still has an outstanding mortgage balance of ¥15 million (James’ is only ¥10 million).
¥15 million yen outstanding mortgage balance × 1% = ¥150,000
¥20 million yen purchase price × ⅔% = ¥133,333
¥133,333 < ¥150,000, therefore Semaj can deduct ¥133,333.
Tax Deduction Guide For Home Owners: Conclusion
For a long time, the Japanese government has allowed home owners to make tax deductions on their income/resident’s tax. This has been 1% of the outstanding mortgage balance, for a period of ten years, for a long time. The cap is ¥40 million in outstanding mortgage balance/¥400,000 maximum deduction per year, or ¥50 million/¥500,000 if it’s “Long-Term Excellent Housing” or “Low-Carbon Housing.” However, this only applies to new homes.
Under the current administration, they have extended it by three years. From Year 11 to Year 13, you may deduct the lesser of either 1% of the outstanding mortgage balance, or ⅔% of the purchase price. Mortgage rates are extremely low in Japan, only 1~1.5% at present. Crunch those numbers. Calculate what speed you should pay it off for maximum savings on both your mortgage interest and taxes.