How do Tax Reductions for Residential Real Estate Work in Japan?

Tax Reductions for Residential Building Acquisitions

After finalizing the deal, paying all of the fees, setting up loan payments, and signing the contract for a property in Japan, everything is finished, right?

About six months to one year after the registration of their property, the newness has already worn off of the new purchase. So, a number of new owners are shocked when they receive a letter from the government requesting even more money! However, the good news is that the total amount of tax can be reduced. Today, we are going to take a look at the property acquisition tax reductions to give you an idea of approximately how much of a reduction you can expect when purchasing property in Japan.

What is the property acquisition tax?

The property acquisition tax is levied any time the ownership of real estate is transferred. This includes sale of new or second-hand property, receiving property as a gift, or exchanging properties, etc. The amount of time for which a property is held plays no role – merely the fact that a property has changed hands is the only requirement for taxation.

The only exception is for inheritance of property, since inheritance tax comes into play in this case.

Buyers receive a notice in the mail approximately six months to one year after transfer of ownership, and property acquisition tax is collected by the local (prefectural) government.

Fixed appraisal value

The appraisal value is not to be confused with the price or actual value of the property. This amount is set by local governments with a special formula to around 60 to 70% of the appraised value of the land and 50 to 70% of the buildings as of 1 January. This value is the basis for which annual taxes (fixed asset tax, city planning tax, property acquisition tax, registration costs, etc.) are calculated.

General calculation

To gain an understanding of the taxation amount that would be applied for properties without any reductions, let’s take a look at the general calculation scheme.

Calculation (Non-Residential)

Tax Payment = Appraisal value * 4% (standard tax rate)

Therefore, under completely normal circumstances, calculation of a property with a building valued at ¥20,000,000 and land valued at ¥70,000,000 would be:

Building: ¥20,000,000 * 0.04 = ¥800,000

Land: ¥70,000,000 * 0.04 = ¥2,800,000

Total: ¥3,600,000

Reductions

As of the writing of this article, the taxation rates for both buildings and land for residential purposes have been reduced until 31 March 2021.

Tax rate for residential buildings and land are reduced to 3% of the appraised value.

In addition, the taxable amounts have also been reduced for both new and used properties. New buildings are reduced by For residential buildings, the deduction rates depend on the age of the building.

The taxable amount for land, on the other hand, is reduced by half and then a deduction rate of either a portion of the fixed asset assessment amount spread over the total lot area or ¥45,000 yen – whichever is greater – is applied.

New Properties

 

Calculation

Requirements

Building

Fixed Asset Tax Appraisal Value – ¥12,000,000 * 3%

l Must be residential (personal first or second residence or rental property)

l Must have a floor area of between 50m² and 240m²

Land

Fixed Asset Tax Appraisal Value * 1/2 *3% - Deduction Amount (the higher of A or B)

A = ¥45,000

B = ([Fixed Asset Tax Appraisal Value / Total Lot Area] * 1/2) * (Taxable Building Floor Area * 2 (max. 200m²) * 3%

l The building must meet the requirements above

l If only land is purchase first, any structures must be completed within three years and before the 31 March 2021 cut-off date.

l If the land is borrowed, any new structures must be completed within one year

Second-Hand Properties

 

Calculation

Requirements

Building

(Fixed Asset Tax Appraisal Value* – Reduction Amount) * 3%

*Can differ considerably based on the prefecture.

Construction Year

Reduction Amount

1997 (After 1 April)

¥12,000,000

1997 (Before 31 March)

¥10,000,000

1989 (Before 31 March)

¥4,500,000

1985 (Before 30 June)

¥4,200,000

1981 (Before 30 June)

¥3,500,000

1975 (Before 31 December)

¥2,300,000

1954 (1 July) – 1963 (31 December)

¥1,000,000

  • Must be residential and the primary or secondary residence of the owner (rental properties are not eligible.)
  • Must have a floor area of between 50m² and 240m²
  • One of the following must be applicable:
  • Must have been completed after 1 January 1982 (as based on the building date in the Fixed Asset Tax Ledger)
  • If the above is not applicable, the structure must be able to show records that it was constructed according to the new earthquake-proofing standards or have defect insurance for existing residences.
  • Must have undergone a retrofitting of seismic protection according to the new standards before moving in.

Land

 

Fixed Asset Tax Evaluation Amount * 1/2 * 3% - Deduction Amount (the higher of A or B)

A =¥45,000

B = ([Fixed Asset Tax Evaluation / Total Lot Area] * 1/2) * (Taxable Floor Area * 2 (max. 200m²)

  • The building must meet the requirements above
  • If only land is purchase first, any structures must be completed within three years and before the 31 March 2021 cut-off date.
  • If the land is borrowed, any new structures must be completed within one year

Example

Finally, let’s take a look at a concrete example. Assuming we have a new residential property with an appraisal value of ¥20,000,000 for the building (100 m²) and ¥70,000,000 for the land (125 m²) that was purchased in June 2018:

Building

Appraisal value

Reduction for residential building acquisition

Standard taxable value

Tax payment

¥20,000,000

¥12,000,000

¥20,000,000 – ¥12,000,000 = ¥8,000,000

¥8,000,000 * 0.03 = ¥240,000

Fixed Asset Tax Appraisal Value – ¥12,000,000 * 3%

Land

Appraisal value

Standard taxable value

Appraised value per 1m²

Tax amount

Reduction for land for residential use (A)

Reduction for land for residential use (B)

Deduction

Tax Payment

¥70,000,000

¥70,000,000 * 1/2 = ¥35,000,000

Standard Taxable ¥35,000,000 / 125m² = ¥280,000/ m²

¥35,000,000 * 0.03 = ¥1,050,000

¥45,000

(¥280,000/m²) * (100m² * 2) * 0.03 = ¥1,680,000

¥1,680,000

¥1,050,000 - ¥1,680,000 = ¥0

Fixed Asset Tax Appraisal Value * 1/2 *3% - Deduction Amount (the higher of A or B)

A = ¥45,000

B = ([Fixed Asset Tax Appraisal Value / Total Lot Area] * 1/2) * (Taxable Building Floor Area * 2 (max. 200m²) * 3%

Total

Tax Payment

¥240,000 + ¥0 = ¥240,000

 

Conclusion

After all of the calculations, we can see that the reductions can add up to a considerable amount. However, since these taxes are determined by the local prefectural, town, or village government, it is important to check with the local authorities for differences in calculation methods and tax rates.

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LIFULL International Investments Group

Source: Tokyo Bureau of Taxation