Taxes are a part of making money. The following is a list of taxes that you will incur as a real estate investor in Japan when buying, selling and owning Japanese real estate.
Taxes When Acquiring Real Estate In Japan
Anyone who makes money will have to pay taxes; as Oliver Wendell Holmes, Jr. once said, “Taxes are what we pay for civilized society.” Real estate in Japan is no different. When acquiring real estate in Japan, there are some taxes that either the buyer or the seller will have to pay. These include: stamp tax, registration and real estate acquisition tax and maybe some consumption tax. This list might seem daunting, but hold on for the good news. Not all of them apply all the time. Some of these are also only a fraction of a percent. Some of these taxes only apply to the ‘tax-assessed value’ of the property, not the ‘market price’ (which is wonderful, because in Japan, the tax-assessed value is often much lower than the market value and ordinarily around 50% of the purchase price). All of this whittles down the list of taxes and how much they will cost, and many of them are conveniently rolled up by the real estate agent into one amount and, once paid during the real estate acquisition process or shortly afterwards, never have to be paid again.
Consumption Tax In Japan
If you have ever bought something from a convenience store in Japan, such as 7-Eleven or Family Mart, then you have already paid this tax, whether it was on your bentō box or a can of beer, listed on your receipt as 「内消費税等」 (“nai-shōhizei nado,” “included consumption tax, etc.”). Did you know that consumption tax (消費税) can apply to real estate, as well?
At this time, the consumption tax is 8%, but it is set to go up to 10% on October 1, 2019. Whether this actually happens on October 1, or whether it will be postponed, remains to be seen—previous hikes in the consumption tax, such as when it increased from 5% to 8% a number of years ago, have been delayed. A 10% consumption tax is not the end of the line; this number could go up or down in the future. The good news is that this consumption tax does not apply to land, only properties, and only on a newly-built property. A real estate investor interested in buying property that is a few years old will not pay this tax- and we exclusively recommend used properties for investment.
Japanese Stamp Tax
One pays stamp tax, or inshizei (印紙税) on all transactions exceeding ¥10,000. This stamp tax ranges from ¥200 for transactions of equal to or less than ¥0.5 million (rare in the world of Japanese real estate—perhaps a small weekend farming plot in rural Hokkaidō) to ¥480,000 if the property is worth ¥500 billion or more (about US$4.58 billion). Because of this, stamp tax is extremely unlikely to be a significant cost in your calculations.
Real Estate Registration Tax
This tax is paid to cover the cost of registering the land/building in the Real Estate Registry (登記簿, Tōkibo). It is in the Real Estate Registry that people can see who owns which piece of property. This tax is calculated as 0.4% of the value of the property if it is an initial registration of ownership, but if it is a transfer of ownership (i.e a used property), then a 2% tax will be payable based on the ‘taxable value’ of the property (again, this is not the same as the ‘market price’ and is much less!).
Real Estate Acquisition Tax In Japan
Real estate acquisition tax (不動産取得税, fudōsan shutoku zei) is typically payable at 3~4% of the tax-assessed value of the property (Again, not the market price– seeing a trend here?). It tends to be at the lower end of that scale for land and residential property. All of the information about the value and how much it will be taxed are laid out clearly in the Evaluation Notification (評価証明, hyōka shōmei).
Taxes When Owning Real Estate In Japan – Fixed Asset Tax (FAT)
In Japan, the main property tax, called “Fixed Asset Tax” (固定資産税, kotei shisan zei) is 1.4% of the tax assessed value. This compares favourably with the property taxes in many other developed countries. To give you a frame of reference, in New York State, there is an average property tax rate of 1.65%, and in London, this is 1.96%. In Japan this tax only applies to the tax-assessed value of the property, unlike in other developed countries where it is based on the market price.
Taxes When Owning Real Estate In Japan – City Planning Tax (CPT)
City Planning Tax (都市計画税, toshi keikaku zei) is another tax which is paid every year, and similar to Fixed Asset Tax, is based on the tax-assessed value of the property. This one is only 0.3%, and if the property is outside of the city planning areas (都市計画区域, toshi keikaku kuiki), where Japanese zoning laws apply, it might not even be assessed. For example, if an investor has bought a property in the city with a tax-assessed value of ¥10,000,000, he or she would have to pay ¥30,000 per year for City Planning Tax; however, if the property is located outside of city planning areas, where Japanese zoning laws do not apply, then this amount could instead be ¥0 per year.
Taxes When Selling Real Estate In Japan – Capital Gains Tax
If you sell an asset for more than you paid for it you will pay capital gains tax on the difference. This rate is either 15% or 30%, depending on when the owner sells the asset. If sold within five years, the rate is 30%; otherwise, it is 15%, although actual capital gains taxes paid can be reduced by using deductions. Only the seller has to pay capital gains, therefore, when you first buy the property, you will not have to pay this tax. Once you are the owner, you will only need to pay capital gains tax if you sell at a profit (regardless of the cash flow that the property has produced while you owned it). The ideal holding period for real estate assets is forever, therefore ideally, one would never have to pay capital gains tax.
In Closing – Too Many Taxes?
What do Robert T. Kiyosaki, author of Rich Dad, Poor Dad, Wang Jianlin, the 18th richest person in the world, and the current President of the United States all have in common? If you said “They’re all rich,” then you are right, but there’s another key point here: they all built a significant portion of those riches from real estate. Real estate investment is lucrative, and has produced too many billionaires to count. Real estate allows investors to compound their returns with very little effort. What happens to a 10,000 dollar investment over 30 years if it makes just 5% per year?
10,000 × 1.05³° = $43,219
$10,000 invested for 30 years with an annual ROI of 5% will Become over $43,219 in 30 years.
Whereas savings accounts and bonds might be wise choices for someone saving for a relatively short-term goal such as the down payment on a house or a wedding, for those want who their wealth to multiply, and have years or even decades to weather the short-term ups and downs of the market, then real estate provides superior returns. Although investors will probably also own stocks, real estate offers several things that stocks do not: first of all, few things generate as much envy in one’s peers as pointing to a nearby building and saying “I own that building,” second, the value of property fluctuates less than the price of stocks, and third, in Japan, there are great tax benefits from owning real estate, with numerous deductions that one can make to lower one’s tax liabilities.
Although there may appear to be a lot of taxes, the largest taxes (3%, and 2%) only occur once at the beginning. Once your initial transaction expenses are paid you never have to pay them again. Secondly, the other taxes ordinarily relate to the taxable value of the property, which for investment property, is sometimes even less than 50% of the market price (Why? Because the property is priced relative to its ability to produce regular cash-flow, not relative to the intrinsic value of the building and its land value). If you are paying ownership taxes that you feel to be ‘high‘, that is because the value of the asset that you own is high– this in turn supports and sustains the value of your investment and means that you will have no trouble in selling it in the future as the government is essentially validating the asset value for you. Japan also offers large tax breaks for real estate owners. In Japan, owners of “fixed assets” (i.e real estate) are the only group of investors who have numerous allowances and deductions to reduce their taxes payable whilst conducting money-making activities- owners of other asset classes (like stocks) get left out in the cold at tax season. Simply put: If you make money- you will pay taxes. However, the taxes will likely not be significant in comparison to your profits once everything is accounted for. The monthly income from Japanese real estate is as reliable as a Swiss clock the risks are low. Why else would we be happy to pay the taxes?