Taxes on Real Estate Rental Income in Japan

Japan is said to be one of the most attractive countries in the world for foreign real estate investment, since there are very few restrictions on foreign investors buying and owning property. The country’s excellent infrastructure, reliable services, and diligent citizenry also add to this attraction.

But one thing that often causes confusion to foreign investors is Japan’s complicated taxation system. Depending on many different factors, various taxes can be imposed on an investment property. Understanding these taxes is an indispensable part of investing in Japanese real estate.

In this article, we explain all about the taxes related to real estate rental income in Japan, mainly with respect to foreign-owned properties.

■ The Types of Taxes on Real Estate Rental Income

The main tax imposed on real estate rental income is income tax. As the name suggests, income tax is a type of tax imposed on the income generated by an individual or entity from leasing a property. Simply owning a property in Japan will not automatically incur income tax.

Besides real estate rental income, income tax is also imposed if you make any profit from selling a property in Japan. This is also known as capital gains tax.

Another tax that is imposed on real estate rental income is inhabitant tax. Inhabitant tax is a tax levied by municipalities on residents who have been living in Japan continuously for at least 1 year, and is calculated based on your income for the previous year. The tax rate can vary depending on the specific prefecture and municipality.

Even if you are mainly based overseas, inhabitant tax will be imposed as long as you are a registered resident of Japan. It is also imposed regardless of your residency status (e.g. even if you have permanent residency).

Depending on the specifics of your rental property in Japan, you may also be liable to pay consumption tax.

If the property is a residential property that is being leased for the purpose of residence of the tenant, then consumption tax will not be imposed on your rental income.

However, if the rental property is a commercial property or building, and the tenant is using it as a place of business, you as the property owner will be liable to pay consumption tax, regardless of whether you are a resident of Japan or not.

Note that from October 2023, Japan is introducing a “qualified invoice system” that is expected to make the calculation and reporting of consumption tax more complicated.

If you are an owner of commercial property for lease in Japan but are based overseas, it is highly recommended that you consult with a real estate agency and tax accountant regarding this new system and how to appoint a tax agent.

At wagaya Japan, we can help introduce tax accountants and judicial scriveners who can handle taxation matters for foreign property owners who are based overseas. Feel free to contact us if you are considering buying a property in Japan.

■ Tax Withholding System

Income tax is normally calculated and paid after the income earner files a tax return, but the procedure is different for a foreign property owner who resides overseas. In this case, rental income from your property in Japan may be subject to withholding tax. This system is used to prevent the omission or non-declaration of real estate income gained by foreign property owners.

Withholding tax is not directly paid by foreign property owners themselves. Instead, it is paid by the tenant who is either a corporate entity, or an individual that is renting the property for purposes other than their own or their relatives’ residence. A tenant who is an individual that is renting the property for their own or their relatives’ residence is exempted from withholding tax.

Tenants who are liable to pay withholding tax must withhold 20.42% of the monthly rent and pay it to the tax office every month.

It is thus important to understand that your liability to pay withholding tax depends on the type of tenant you are leasing your property to.

■ Reductions on the Withholding Tax Rate

As a property owner living overseas, the tax withholding system described above can significantly reduce the income you gain from your property in Japan. However, if you are residing in a country that has concluded a tax treaty with Japan, you may be entitled to an exemption or reduction of the withholding tax.

One such country is the United States. The Japan – U.S. Tax Treaty exempts property owners residing in the United States from paying withholding tax on their properties in Japan.

However, this exemption is not applied automatically. The owner must file an application to the relevant authority in their country of residence.

The specific conditions and procedures vary for each country, so it is a good idea to first confirm if your country is a tax treaty signatory with Japan, then consult with a tax accountant regarding the relevant procedures.

■ Applying for Tax Refunds

If you are not exempted from paying withholding tax, and the withholding tax deducted from your rental income exceeds the actual income tax you would have been liable to pay in Japan, you can apply for a refund of the amount in excess of your income tax liability.

To apply for a refund, you need to submit an income tax return along with the required documentation to the tax office in Japan. This must be filed between February 16th and March 15th of the year following the calendar year where you incurred withholding taxes.

Note that applying for a refund requires the preparation of several documents and the accurate calculation of your income tax liability in Japan. This calculation can be quite complicated especially with regards to real estate income, and most Japanese property owners entrust the process to tax agents.

If you are a property owner living overseas, it can be even more troublesome and costly to prepare all the required documents and make the necessary applications on your own, so it is a good idea to consult with a local tax agent.

As you can see above, taxes on real estate rental income in Japan can be quite complicated depending on various factors. The tax withholding system and procedures for exemptions or tax refunds can also be difficult to understand for the uninitiated.

If you want to ensure a successful property investment in Japan with regards to taxes, it is best to consult with a tax specialist before making an investment.

At wagaya Japan, we have highly-experienced multilingual staff who can provide total support for your real estate investment in Japan, including the necessary taxation management. Contact us for consultations on buying and selling property in Japan.