Real estate taxation – introduction

August 1, 2010  |  Real Estate

A Japanese room with traditional features including tatami, shoji

This post is a brief introduction to issues arising in Japanese real estate taxation.   Below is a listing of some of the factors that complicate the taxation of real estate transactions in Japan. At the end of the post is a matrix showing different types of tax that often apply to real estate taxation, the different transactions to which such taxes apply and the government office administering the tax concerned.

Issues in Japanese real estate taxation

Issues that complicate Japanese real estate taxation include:

  • The range of different types of taxes that can apply to property transactions.  In addition to corporate tax, stamp duty, consumption tax, income tax and inheritance taxes that can apply to both real estate and other transactions stamp duty, real estate acquisition tax, fixed assets and city planning tax and special land holding tax also have to be considered.
  • Different real estate valuation bases;  “road side value”, “market value”, “public value” can all be used in the calculation of the basis for different types of taxes.  The relationship between these valuation bases and market value is often obscure for people not familiar with the detail of the Japanese land valuation systems.
  • Taxes are administered by both local and national tax authorities as well as by non tax offices in relation to  registration taxes.
  • There are a wide variety of entities and investment structures that can be used for real estate transactions. The structure chosen can have a large impact on the final effective tax rate paid on the transaction. Entities commonly used in real estate transactions include direct corporate ownership, tokumei kumiai structures, tokutei mokuteki kaisha (REIT style special purpose vehicles).
  • The different timing of application of taxes to real estate.  Taxes may be payable on initial completion and registration of ownership of buildings, on transfer of land and buildings, on the ongoing holding of real estate and on exit from the investment.
  • The underlying transaction giving rise to the transfer or property.  The incidence of tax can vary depending on whether the real estate transaction is further to sale, gift or inheritance.
  • Corporate taxation itself has become increasingly more complex, including the introduction of group taxation, corporate reorganisation rules, tax consolidation and so on.
  • Government tax policy and tax incentives applied to real estate taxation often change.

Real estate taxation summary and overview

The table below collates and summarises the impact of some of the issues above.  Future posts will analyse taxation of these transactions in more detail.

Right - type of tax
National taxPrefectural taxPrefectural and municipal tax Municipal tax
Below - application, situationStamp taxConsumption taxRegistration and license taxIncome taxInheritance taxGift, estate taxLand value taxReal estate acquisition taxInhabitants taxFixed assets, city planning taxSpecial land holding tax
Taxes on real estate acquisitionNew built or purchasedAppliesAppliesAppliesApplies (res loan dedn)Does not applySometimes applies (e.g on gift to buy)Does not applyAppliesApplies (res loan dedn)Does not applyDoes not apply (suspended)
On inheritanceDoes not applyDoes not applyAppliesDoes not applyAppliesSometimes applies (on splits post inheritance)Does not applyDoes not applyDoes not applyDoes not applyDoes not apply
On giftApplies (on contract for gift)Does not applyAppliesDoes not applySometimes applies (gifts three years prior)AppliesDoes not applyAppliesDoes not applyDoes not applyDoes not apply
Taxes on holding real estateOwn homeDoes not applyDoes not applyDoes not applyAppliesDoes not applyDoes not applyDoes not apply (suspended)Does not applyDoes not applyAppliesDoes not apply (suspended)
RentedSometimes applies (rent of land)Sometimes applies (non-residential let)Does not applyApplies (income from real estate)Does not applyDoes not applyDoes not apply (suspended)Does not applyApplies (income from real estate)AppliesDoes not apply (suspended)
Taxes at time of transferAppliesApplies (assets used in business)Does not applyAppliesSometimes applies (on split)Sometimes applies (e.g. low value transfer)Does not applyDoes not applyAppliesDoes not applyDoes not apply
Government office handling taxTax officeLegal officeTax officePrefectual tax officeLocal govt. office (for some special areas in Tokyo, tax office)
See note (2) for details around valuation timing and announcement of valueMarket valeAppliedAppliedNot usedNot usedSometimes applied (e.g. low value transfers)Not usedNot usedAppliedNot usedNot used (suspended)
Public valueNot usedNot usedNot usedAppliedNot usedNot usedNot usedNot usedNot usedNot usedNot used
"Road side" valueNot usedNot usedNot usedAppliedApplied (note 1)Applied (note 1)Not used (suspended)Not usedNot usedNot usedNot used
Fixed asset valuation - landNot usedNot usedAppliedAppliedSometimes appliedSometimes appliedNot used (suspended)AppliedNot usedAppliedNot used
Fixed asset valuation - buildingsNot usedNot usedAppliedAppliedAppliedAppliedNot applicableAppliedNot usedAppliedNot applicable

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