Taxes Applied to Real Estate Purchases
Tax consultations and calculations may only be carried out by a tax accountant, and by extension we are unable to provide exact taxation numbers.
Below we provide the means to approximate these for yourself, but in an official capacity this must be done by a tax accountant.
Property Tax and City Planning Tax
Property tax and city planning tax, imposed on owners of fixed assets such as land and buildings on January 1 of each year, are paid to the local municipalities where the assets are located. Amounts are calculated based on the value of the assets. The standard rate of property tax is 1.4% and the rate of city planning tax is 0.3%.
Real Estate Aquisition Tax
A real estate acquisition tax is imposed only once when real estate such as land and buildings is acquired. Acquisition of real estate is defined as acquisition of ownership of real estate through transactions such as buying and selling, donations, exchanges, and construction (for new buildings, extensions, or alterations). If real estate is acquired by inheritance, this tax need not be paid. A standard rate of 4% (although special provisions present 3% for land and housing and 4% for buildings other than housing) is applied against the real estate value.
Registration and License Tax
When land and buildings are constructed or bought, registration and license taxes are imposed mainly for registration of preservation and relocation of ownership. The following tax rates are imposed against the real estate value for registration and license taxes.
| Type of Registration | Tax Rate |
|---|---|
| Registration of Preservation of Ownership | 0.4% |
| Registration of Relocation of Ownership | 2.0% |
| Registration of Establishment of Mortgage | 0.4% |
Consumption Tax
A consumption tax is imposed on transactions such as the sale of goods and the supply of services in Japan. The consumption tax rate was raised to 10% on October 1, 2019. Whereas specific real estate transactions are subject to the consumption tax, others are not, as shown below.
[Subject to consumption tax]
-Purchase price of buildings, construction sales price
-Brokerage commissions (for sales and leasing)
-Housing loan administration fees
-Rent for offices, stores, etc.
-Judicial scrivener fees, registered land and building investigator fees
[Not Subject to consumption tax]
-Purchase price of land
-Interest and guarantee fee for housing loan
-Fire and life insurance premiums
-Land rent, residential rent
-Security deposits, tenant leaseholds
Stamp Tax
When documents such as contracts and receipts are prepared, revenue stamps are required to be purchased and pasted on the documents and then postmarks need to be stamped on them. This cost can range from ¥200 for a payment of ¥1 million, up to ¥200,000 for a payment exceeding 1 billion JPY for receipts, and up to ¥480,000 for sales contracts exceeding ¥5 billion.
Real Estate Broker Commissions
[Sales of real estate]
When a real estate transaction is concluded, a brokerage commission is required to be paid to the broker. The amount of this commission, whose upper limit is regulated by the Building Lots and Buildings Transaction Business Act, can be decided by the real estate company on its own as long as it does not exceed the limit.
The upper limit of commissions for sales contracts is 3% of the sales price + ¥60,000 + tax (10%), only for the case that the property price is more than ¥4,000,000.
Half of the brokerage commission for a sales contract is generally paid when the contract is entered into. The other half is paid when the payment is settled and the property delivered.
Tax applied to rental income
When a corporation earns income from renting its property, the rental income is included in the total amount of income subject to corporate, resident, and business tax. These taxes are imposed on rental income at approximately 30%.
In the case of an individual residing in Japan, rental income from renting real estate is included in the total amount of income subject to the total amount of taxable income as shown in the table below.
| Taxable Income | Tax Rate |
|---|---|
| Up to ¥1,950,000 | 5% |
| ¥1,950,000 to ¥3,300,000 | 10% |
| ¥3,300,000 to ¥6,950,000 | 20% |
| ¥6,950,000 to ¥9,000,000 | 23% |
| ¥9,000,000 to ¥18,000,000 | 33% |
| ¥18,000,000 to ¥40,000,000 | 40% |
| More than ¥40,000,000 | 45% |
In the case of a non-resident individual or a foreign corporation, income tax is withheld at the payment source when they earn domestic source income subject to a withholding tax in Japan. When payment to non-residents is made in foreign currency, tax withholding is done in an amount converted to Japanese yen. The withholding tax rate for selling a property is 10.21% of the sale price. The withholding tax rate for renting a property is 20.42% of the rental income.
Capital Gains Tax
Capital gains tax is imposed on gains from sales of real estate such as land and buildings. In the case of an individual, real estate income is calculated separately from other income calculations. If the holding period of a property is five years or less, income tax of 30% and resident tax of 9% are imposed as a capital gains tax on the transfer of real estate. If the holding period of a property is more than five years, income tax of 15% and resident tax of 5% are imposed as a capital gains tax on the transfer of real estate.
In the case of a corporation, the gain is included in taxable revenue to calculate the total amount of taxable income to determine the amount of corporate tax, for which an effective corporate tax rate of approximately 30% is applied.