Taxes Related to "Akiya" Abandoned Houses in Japan

Japan is said to be one of the most attractive countries in the world for foreign real estate investment. One aspect that is gaining particular interest is investment in Japan’s abandoned houses or “akiya”.

Japan’s declining birthrate and rapidly shrinking population has led to a sharp increase in abandoned houses, and it has become a major social issue. The fact that the houses have been abandoned indicates that most of these properties likely have low real estate value.

However, there are also some abandoned houses that are estimated to have high tenancy or resale demand if they are renovated and refurbished properly. These are the properties that are being quietly sought by real estate investors.

In this article, we explain the taxes you have to pay when you choose to buy an “akiya” abandoned house in Japan, especially if you are an investor residing overseas.

■ Taxes involved when purchasing an abandoned house

First, let’s take a look at the taxes you incur when you buy an abandoned house

• Consumption tax on the property sale

When you buy a property in Japan, you will incur a consumption tax of 10% (as of 2023) on the price of the property, regardless of whether or not it is an abandoned house. Note that this only applies if the current owner of the property is a corporate entity (e.g. a real estate agency). If the owner is an individual, then no consumption tax will be levied.

Furthermore, consumption tax is only levied on the price of the buildings, and not on the price of the land. If you are buying an abandoned house, depending on the property conditions, the appraisal value of the building may be close to zero, which means that any consumption tax incurred will be very small in amount.

• Consumption tax on the brokerage fee

When you buy an abandoned house through a contract with a real estate agency or other intermediary, you will have to pay a brokerage fee, which is subject to consumption tax. In Japan, real estate transactions are almost always conducted through a real estate agency, and not directly between individuals. Therefore, paying consumption tax on the brokerage fee is a given.

• Consumption tax on the judicial scrivener fees

In Japan, registration of property ownership and other legal procedures can be complicated and requires preparing several documents, so this process is normally entrusted to a licensed judicial scrivener. An administrative fee must be paid to the judicial scrivener, and this fee is subject to consumption tax.

• Registration and license tax

The registration and license tax is a tax imposed on the preservation or transfer of the ownership of a property or the establishment of a mortgage. The amount of this tax varies depending on the price and conditions of the property you are buying.

• Stamp duty

Stamp duty is a tax imposed on legal contracts which includes real estate transactions. Its amount depends on the transaction value, and is paid by affixing a prepaid stamp on the document.

At wagaya Japan, we have highly-experienced multilingual staff who can provide total support for your real estate investment in Japan. Contact us for consultations on buying and selling property or managing your real estate tax obligations in Japan.

■ Taxes involved when owning a property

Next, let’s take a look at the taxes you incur when you are already the owner of the abandoned house.

• Income tax

If you decide to convert the abandoned house into a rental property and you gain rental income from leasing it, you will be liable to pay income tax. This is normally paid once a year after filing an annual tax return where you report your income and calculate your tax liability.

• Fixed asset tax

Fixed asset tax (also known as property tax) is a municipal tax imposed annually on owners of fixed assets such as land and buildings. This is imposed even if the building is an abandoned house. The tax rate varies by specific municipality and is also determined by the assessed value of the property.

Note: The Vacant Houses Special Measures Act of Japan designates properties that pose a risk of collapse as “vacant houses” and enables municipalities to issue recommendations and orders to their owners. If improvements are not made to the property, the owner may be liable to pay up to six times more in property tax, and may also face other fines and penalties. You should keep this in mind if you are thinking of buying an abandoned house and turning into a rental property.

• City planning tax

City planning tax is a municipal tax imposed on properties in designated urbanization promotion areas. The tax rate varies depending on the specific municipality, but is capped at 0.3%. It must be paid annually regardless of whether or not the property is being used.

• Withholding tax

Withholding tax is not a separate tax in itself, but is a special system where income tax that is levied on rental income is withheld at the payment source. Withholding tax is not directly paid by the property owner, but is paid by the tenant who is renting the property. When the tenant pays their monthly rent, they must withhold 20.42% (as of 2023) of the rent and pay it to the tax office every month.

If the withholding tax deducted from your rental income exceeds the actual income tax you are liable to pay, you can file a tax return in Japan to be eligible for a tax refund.

At wagaya Japan, we have highly-experienced multilingual staff who can provide total support for your real estate investment in Japan. Contact us for consultations on buying and selling property or managing your real estate tax obligations in Japan.

■ Taxes involved when selling a property

You will also incur certain taxes when you choose to sell the property you own. Let’s take a look at these taxes.

• Consumption tax on the renovation fees

If you buy an abandoned home with the intent of reselling it after renovation, you are liable to pay consumption tax on the renovation fees. However, if the property meets certain conditions, you may be eligible for a subsidy or a tax break from the relevant municipality. It is a good idea to check the subsidies offered by the local municipality before doing renovation on an abandoned house.

• Capital gains tax

Capital gains tax is a tax imposed on any profit you make from selling a property. The tax rate can vary greatly depending on the income gained as well as the length of time you owned the property.

If you owned the property for five years or less (short-term capital gains), the tax rate is 39.63%. If you owned the property for more than five years (long-term capital gains), the tax rate is 20.315% (as of 2023). This is an important consideration if you are planning to resell an abandoned home.

As you can see, there are many different taxes involved in purchasing, owning, and selling an abandoned house in Japan. Tax rates may also vary depending on the location of the property and various other conditions, making it complicated for the uninitiated.

Tax payment procedures can also be quite complicated, and laws regarding taxes are amended fairly often. If you are an investor residing overseas, we strongly recommend getting a knowledgeable tax agent in Japan whom you can trust to handle all your tax-related procedures.

Another important consideration when you buy an investment property in Japan is the management of the property. Good property management is the key to earning a solid income from your property.

For more information, check out the following article.

Management and Leasing of Your Investment Property in Japan

At wagaya Japan, we not only provide support for buying and selling properties, we also offer property management services for foreign property owners. Feel free to contact us for details.