Successful investment strategy doesn’t simply mean buying and operating property.
Exit strategy is significantly important for the overall success.
You need to think about the exit strategy while you are acquiring property.
When you build the exit strategy, tax laws play the important role.
Today I am discussing the tax regulations when you sell your property outright.
Tax when you exit the property
The capital gain generated by selling your real estate is called transfer
income in Japan (It is almost same as capital gain tax in US)
To calculate the capital gains or losses, take the sales price then deduct selling expenses,
from the amount realized. Then deduct the original cost of property, plus expenses deemed to
have increased its value, less claims which have notionally decreased its value.
Expenses deemed to have increased its value are capital improvements
(roof replacement, central air conditioning installation, rewiring, etc.), assessments for local improvements
(water connections, sidewalks, roads), casualty losses (restoration of damaged property), legal fees.
Expenses deemed to have decreased its value are depreciation, casualty or theft loss deductions
and insurance reimbursement, certain credits, exclusions and deductions.
For transfer income, income tax and resident tax are levied separately from other income such as salary.
If your property does not generates any profit after the cost, there is no income tax.
Calculation of transfer income
Profit = transfer proceeds amount(sale value) – Acquisition cost – Transfer cost
Transfer proceeds: Transfer price of land / building
Acquisition cost :
From the sum of the purchase price of the land building and the cost required for acquisition,
the amount obtained by deducting the depreciation cost of the building
Taxable income = transfer income – (special deduction)
* Special exemption for special deduction of 30 million yen for residential use
Calculation of tax on taxable income from property investment
Tax = taxable income × tax rate (see the latest tax rate below)
Practice of transfer income arising from property deals is treated separately
from other forms of income and the tax rate varies depending on the application and the period of ownership of the real estate.
There are two different taxation methods depending on ownership period,
Long-term income and short-term income.
Less than 5 years : Treated as short-term income
Over 5 years : Treated as long-term income
-Short term income tax rate (less than 5 years)
39.63% (Income Tax 30.63%+ Resident Tax 9%)
-Long term income tax (over 5 years)
20.315% (Income Tax 15.315%+ Resident Tax 5%)
Rate is as of end 2017
The rates for short term and long term are significantly different.
Please begin building your exit strategy bearing the difference of tax rate in your mind.
Real estate investing consultant and author.
Toshihiko is currently writing a book about the real estate investing in Japan
for foreign investors.
Founder of Yamamoto Property Advisory in Tokyo.
International property Investment consultant and licensed
real estate broker (Japan).
He serves the foreign companies and individuals to buy and sell
the real estates in Japan as well as own homes.
He holds a Bachelor’s degree in Economics from
Osaka Prefecture University in Japan
and a MBA from Bond University in Australia