Japan Tax & Accounting provides investors with accounting and tax information about the real estate investment in Japan.

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1. Japan Tax on Real Estate and­­­ Rental Income

1-1    Real Estate Income Tax

Your real estate income will be considered as a part of your income, and it is subjected to taxation as income tax (national tax) and inhabitant tax.

Real estate income is calculated by subtracting necessary expenses from total earnings. If you have deficits in income, you may allowed to offset the loss against other income. (However, the interest paid on loans for the acquisition of land will not be allowed to include as expenses to offset the loss against other income)

Expenses that can be included to necessary expenses are repairs and maintenance expenses, fixed asset tax, interest on liabilities, and depreciation expenses etc.

1-2    Real Estate Income for Tax Purposes

Real estate income for tax purposes is defined broadly and includes income from the rental of apartment, building office, house, room, garage, land, as well as rights over land. Some of the cases below will be defined as other income.

  • Room renting or lodging with meals is business income or miscellaneous income.
  • Rental income from landlord’s employee as dormitory rent is business income.
  • In principle, key money that you receive temporarily when establishing the leasehold is real estate income. However, if amount of key money is more than half price of the market-rate of the land, it will be considered as capital gains.
  • Rent over signboards is rental income. However, if the signboard is placed indoor, it will be considered as business income.

1-3    How to Calculate Real Estate Income

Total earnings – Necessary Expenses = Real Estate Income

1-3-1    Total Earnings

The total real estate income for tax purposed is whole income earned from January 1 through December 31 of the relevant year.

Deposit Money “Shiki-kin” and Security Deposit “Hosho-kin”

If you don’t have to return the deposit (whole amount or partly) to tenant regardless of rental period Reckon up the deposit as your income for the year that you received.
If the amount of deposit you don’t have to return increases according to the lapse of rental period Reckon up the increased amount as your income for the relevant year.
If the amount of deposit you don’t have to return will be decided at the time of cancellation Reckon up the fixed amount as your income for the relevant year when cancellation occurred.

1-3-2 Necessary Expense

Necessary expense for calculating real estate income

Taxes and Duties Consumption tax, fixed asset tax, registration and license tax, real estate acquisition tax, stamp duties, business tax, etc. (Income tax and inhabitant tax are excluded. Registration and license tax and real estate acquisition tax can be included to capital gain tax calculation in cases)
Casualty Insurance Premiums Premiums for fire insurance on real estate to rent
Repair and Maintenance Expenses Expenses for repair and maintenance of real estate to rent
Interest Paid The amount of interest of loans for land (If total real estate income is deficit, this will not be included to expenses to be offset loss against other income)
Land/House Rent Amount of rent corresponding to the rental real estate
Depreciation Buildings, Structures and Equipment will be recognized as depreciable assets
Salary for Family Employee If renting is ran as a business, followings will be allowed to include to expenses; the amount of wages for family employees of blue return taxpayer, or the amount of deduction for family employees of white return taxpayer.
Compensation for removal Money paid to tenant as compensation for removal caused by rebuilding house.

This article will continued to subject about “Depreciation”.

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