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

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4. Japan tax at the time of selling – Capital Gain

4.1 Capital Gain

Capital Gain is income that profited through transferring property.
Capital gain by transferring the property is subjected to taxation as individual income tax (national tax) and inhabitant tax.
To calculate amount of tax for capital gain, you can deduct the acquisition cost and selling cost to figure out the tax base.
There are some different reducing measures regarding the type of transfer.

  1. Special deduction of 30,000,000 yen for residential property
  2. Reduced tax rate for residential property
  3. Special measure for replacement of certain residential property

Note: Aggregate taxation and Separate taxation
Principally, total income earned during a year is subject to individual income tax and inhabitant tax, but capital gain however, is taxed separately from other income.

4.1.1 Capital gains Excluded from Taxation

4.1.1.1 Case of transferring property by compulsory conversion

A case of capital gains by transferring the property is not subject to taxation if the transfer was done by compulsory conversion due to having difficulty of repayment of an obligation because of loss of financial resources.

4.1.1.2 Case of payment of inheritance tax in kind

A case of capital gains by transferring the property is not subject to taxation if the transfer was done by paying inheritance tax in kind with permission.

4.1.1.3 Case of donating property to government, etc.

4.1.2 Amount of capital gain to be subject to taxation

Amount of capital gain minus cost of acquisition and expenses for installation, and special deduction by transferring the property is subjected to taxation as income tax and inhabitant tax.

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4.1.3 Acquisition cost

Method of calculation for acquisition cost is as below;
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  1. If the property was purchased: Sum of the cost of purchase of property and the cost that was payed directly to use the property such as price of property, buying commission fee, compensation for removal for buying the property, Stamp tax for the contract, Registration and License tax, fee for registration, real property acquisition tax, cost for development of residential land, etc. However, the Registration and License tax for business and real property acquisition tax payed as necessary expenses for business cannot be included.
  2. If the property was self-construction, self-made: Expenses such as raw cost of materials for construction, labor etc.
  3. Cost for development of residential land such as cost for reclamation, piling up the ground, leveling the ground, earth cutting, building bulwark or other improvement for the land
  4. Cost for demolition of building that acquired with the land, and demolished within a year.
  5. Fee for arranging mortgage to acquire the property such as fee for establishment of mortgage, fee for preparation of notarized deed, etc.

*1: Cost for acquisition means amount of money which adding the expenses payed to acquire the property to its price or the construction cost.
*2: Expenses for installation means cost for installing new equipment to property after acquisition.
*3: Expenses for improvement means cost for improvement after acquisition, excluding repair cost.
*4: How to figure out the equivalent amount to the depreciation
Depreciation of property to transfer while it was used for business:
Accumulated amount of depreciation until transfer (for detail of calculation formula, refer to Method of depreciation)
Depreciation of property to transfer until the day changed from use for business to non-business:
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Depreciation ratio corresponding to 1.5 times years of useful life of the transferred property (residence):

Category Depreciation ratio
Wood construction 0.031
Wood frame mortar construction 0.034
Steel frame reinforced concrete buildings or reinforced concrete buildings 0.015
Metal construction (thickness of internal frame is 3 mm or below) 0.036
Metal construction (thickness of internal frame exceeds 3 mm) 0.025
Metal construction (thickness of internal frame exceeds 4 mm) 0.020
Brick, stone or block construction 0.018

If there is fraction of less than 6 month in elapsed year, it is rounded down.

Notes:
★Cost when acquiring the property by inheritance, bequeath, gift
The value and time of purchase of the decedent / giver of bequeath / donor also will be inherited not only the property. The expenses for transferring the name for registration and real estate acquisition tax can be included to acquisition cost.
★How to add acquisition cost for transferring the property if acquired by inheritance
If the property was transferred within 3 years after next day of deadline of declaration of inheritance tax, you can add expenses to acquisition cost using formula following. However, if the additional expenses excess the capital gain, the cost will be the same as capital gain as highest limit.
Case A: Other than land and the right to use land was the transferred property
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Case B: Land and the right to use land was the transferred property
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★If the acquisition cost is unknown
An amount equal to 5% of the income by selling the property can be deemed as approximate acquisition cost.
★If the acquisition price is unknown
How to calculate the price of the house from combined price of land and house

  1. If the contract mentions about the price separately from one to each other, it is the price of the house. However, even it is not written the price separately, it is possible to know the price of house and land by calculating with formula below, if the consumption tax of the house was mentioned (because land is not to be taxed).
  2. image017

  3. If the contract does not mention about the price of the land and house, primarily, the price of the land and house deeded by the current market price when it is purchased, but it is also possible to calculated using standard price of houses (See Table) with formula below.
  1. The hose was newly built when purchased
  2. image018

  3. The house was used when purchased
  4. image019

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