Must know for rental real estate owners! Business tax on real estate income

As you may know, the profit you make from renting real estate will be taxed.
Real estate income is combined with other income to calculate your income tax and resident tax.

Another tax that applies is the so-called “business tax.”

There is also property tax and other taxes levied on the real estate property itself, but these are considered expenses.
In this article, I would like to talk about “Other taxes” related to rental property management, including the Business Tax.

What is Business Tax?

The Business Tax is levied on business income and real estate income that exceeds a certain amount.
For example, if an individual operates a manufacturing business, a wholesale or service business, etc., the individual will pay business tax when the profit earned from the business exceeds a certain amount.

For real estate, the prefectural government may tax people who hold real estate for rent exceeding a certain standard. However, you may consider business tax as part of your necessary expenses.

The standards for being considered a business

The income earned by an individual from a rental real estate business is subject to business tax only if the rental of the real estate property falls under “Real estate rental business” as specified by the Business Tax.

Whether or not this standard is met is decided based on the number of properties and area of the real estate being leased. Although the criteria may vary by area, generally speaking, the two cases below are regarded as a business:

●For housing, “10 or more detached houses, or 10 or more rooms when ownership is divided”

●For non-residential buildings, “5 or more detached buildings, or 10 or more rooms when ownership is divided.”

Is an individual business owner better or a corporation?

There is a big difference between the above-mentioned taxation system for income from individually-owned businesses and corporate income.
In other words, you may lease the same real estate property for the same rent, but there will be a difference in the amount of tax that you pay depending on whether you are an individual or a corporation.

Individual income tax and resident tax are progressive taxes. This means that the larger the income, the greater the tax you pay might be.
Corporations, on the other hand, pay corporate tax. The corporate tax rate is basically even.

The income tax and resident tax rates on personal income are from 15% to about 55% maximum.
By comparison, the tax on corporate income is about 21% minimum and about 32% maximum, including business tax and other.

The difference in the calculation method of the tax rate when comparing the individual and corporation tax means that:
[Individual business is the better choice if the amount of income is small]
[A corporation is the better choice if the amount of income is large].

As a rule of thumb, if the annual real estate income might be higher than about 4.2 million yen, it may be more advantageous from the point of view of taxation to become a corporation than an individually-owned rental real estate business.

【Message from the author】

This time, we looked at rental real estate management in relation to Business Tax.

For individual projects, I recommend consulting with a tax accountant, who could give you more details.

I sincerely hope that understanding a bit about taxes will help in your real estate management.