Tax treatment of real estate investment in Japan

Today I will explain what makes real estate in Japan a lot better than in other countries, at least for individuals.

In most countries, if you buy an apartment/house for rental as an individual, instead of incorporating, the tax benefits are going to be a bit limited. For example, in most countries, the following may be deductible from your revenues.

  • Interest if you financed through a loan.
  • Renovation and maintenance.
  • Management company.
  • Property tax if any.
  • Insurances.

That is about it. Note that depending on the country, such deduction can only be made on your real estate income itself, not on your global income. This is a lot less interesting as you cannot optimize and make renovations a year you have a lot of income (and therefore a higher income tax bracket). Note also that closing fees (real estate broker and legal costs) are not always deductibles.

In Japan, on top of the above items which can be deduced from your total income (not only the property income itself), you can also deduct:

  • Real estate broker and legal closing fees can be added to the building value (excluding the land value). Then such building value can be depreciated. It is huge, especially in a country where the building value really goes to zero in practice.

Any other charges that can reasonably be linked to the purchase/management of the company can also be deduced.

  • A few examples in case of cost linked to the purchase itself:
    • While looking for a property to purchase, transportation costs to do the visit and go to the appointments.
    • Lunch out during visit days (limit of 5000yen/person/meal I think).
    • Advises from accountant/financial advisor with whom you have lunch (if you invite).
    • If living abroad a plane ticket to Japan for 3 weeks vacations, out of which, 1 week is dedicated to visits.

All the above can be added to the building value and then be amortized* over the remaining life of the building (in the case of the plane ticket example above, 1/3 of the ticket value can be made deductible that way since one third of the time was used for the real estate business).

  • A few example in case of costs linked to the management of the property (see more here):
    • Yearly vacation to Japan, during which time, you taker a few days to see your accountant, see the management company, see the property itself, possibly discuss with contractors for renovation -> the prorated plane ticket value of the time spent over vacations on that can be deducted of your yearly income.
    • Yearly accountant fee used for the tax returns.
    • Bank fees for fund transfers related to the management of the property.
    • PC or a printer purchaser, assuming they will be used, among other things to correspond with the management company, the tenants, the contractors, the accountant etc. assuming it will also be used to keep a clean accounting. -> A certain part of the PC (say 50%) can be considered as an asset which will then be depreciated like a PC bought by a regular company.
    • Train tickets, restaurants expense on the days visiting the management company, the accountant etc.

All those costs can be deduced (or in the case of the PC, amortized), reducing year income directly, saving tax at marginal rate.

Now if you also consider the fact Income tax in Japan is quite high (see here), and the fact that on top of it you have to pay 10% local tax, all those deductions can really help.

Of course, at the end of the days, the above expenses are really used to manage the property so it is perfectly normal to be deducting that, but since it is not deductible in other countries (at least not for an individual owning a few rental properties), that makes Japan a great place for real estate investment.

In other countries, you would have to incorporate to get the same benefits. Depending on the jurisdiction, it may come with tax on capital, onerous reporting requirements, the need to have a partner etc…

* Note that if you end up not buying a property on the same year those expenses are made, it will not be possible to deduce such expenses in further year.