How Is U.S. Rental Income Taxed in Japan? A Guide for Americans with Property in the U.S.

Hello, my name is Taisei Koshida, and I am a certified public accountant and licensed tax accountant in Japan.

In my consultations with Americans living in Japan, I often meet people who still own a home or investment property in the United States.

They may be renting out a house in California, an apartment in New York, or a former home that is now managed by a U.S. property management company.

A common question is:

“Since the property is in the United States, I don’t need to report the rental income in Japan, right?”

No.

Once you become a tax resident of Japan, rental income from U.S. property also needs to be considered for Japanese tax purposes.

And there is another important point: do not simply copy the numbers from your U.S. tax return into your Japanese tax return.

1. U.S. Rental Income Can Be Taxed in the United States

First, the United States has the right to tax rental income from real estate located in the United States.

Article 6 of the U.S.-Japan Tax Treaty provides that income from real property may be taxed in the country where the property is located.

Therefore, the United States can tax rental income from U.S. real estate even if the owner lives in Japan.

2. If You Are a Resident of Japan, You Generally Report It in Japan Too

A resident of Japan is generally subject to Japanese income tax on income from both Japan and overseas, subject to special rules for non-permanent residents.

Therefore, rental income from U.S. real estate is generally reportable in Japan as well.

In Japan, it is generally calculated as real estate income:

Rental income − deductible expenses = real estate income

That sounds simple.

The problem is that deductible expenses under Japanese tax law are not necessarily the same as those on your U.S. tax return.

3. Do Not Simply Use the Net Income from Schedule E

This is important in actual tax return preparation.

If you own rental property in the United States, you probably report the income and expenses on Schedule E of your U.S. tax return.

So I am sometimes asked:

“Can I just convert the net rental income on Schedule E into Japanese yen?”

Generally, no.

Japanese real estate income must be calculated under Japanese tax law.

The amount recognized as income may differ. The deductible expenses may differ too.

One of the biggest differences is depreciation.

4. Depreciation Must Be Calculated Under Japanese Tax Rules

Even if depreciation has already been calculated on your U.S. tax return, you do not simply use the same amount in Japan.

For your Japanese tax return, depreciation must be calculated under Japanese tax rules.

This means checking information such as:

• the original purchase price;
• the allocation between land and building;
• the structure of the building;
• the acquisition date;
• the construction date; and
• whether the building was new or used when purchased.

Your U.S. documents may already separate the value of the land and building, but we still need to determine whether those figures can be used for the Japanese calculation.

If Schedule E shows $20,000 of depreciation, that does not automatically mean that you can deduct $20,000 of depreciation in Japan.

This is one of the areas where the U.S. and Japanese calculations can differ significantly.

5. Special Rules Apply to Losses from Certain Used Overseas Buildings

There is another important rule for used real estate located outside Japan.

In the past, taxpayers sometimes used Japan’s simplified useful-life rules for used overseas buildings to generate large depreciation deductions and offset those losses against salary and other income in Japan.

This is now restricted.

Since 2021, certain losses generated by depreciation on used buildings located outside Japan cannot be fully used to offset other real estate income, salary income, or other income in Japan.

So if your U.S. property produces a large depreciation loss, do not assume that the entire loss can be deducted against your Japanese salary.

6. Expenses Also Need to Be Reviewed Under Japanese Tax Law

Typical expenses related to a rental property can include:

• property management fees;
• repairs and maintenance;
• insurance;
• property taxes;
• mortgage interest;
• HOA fees;
• accounting or professional fees related to the rental; and
• depreciation.

However, an expense is not automatically deductible in Japan just because it appears as an expense on Schedule E.

It needs to qualify as a deductible expense in calculating Japanese real estate income.

For a mortgage, the principal repayment itself is not an expense. The interest portion needs to be identified separately.

There are also restrictions on offsetting certain interest expenses related to loans used to acquire land when the real estate activity produces a loss.

7. Do Not Simply Convert Everything Using the Year-End Exchange Rate

A Japanese tax return is prepared in Japanese yen.

U.S. dollar rental income and expenses therefore need to be converted into yen.

As a general rule, foreign-currency transactions are converted using the applicable exchange rate when the transaction is recognized.

For real estate income, certain reasonable methods, including an average exchange rate for a period, can also be used consistently where permitted.

So if you receive rent every month, you should not automatically take all of the year’s income and expenses and convert them using only the December 31 exchange rate.

8. U.S. Non-Permanent Residents Need to Check Remittances

This is particularly important for foreign nationals who recently moved to Japan.

If you do not have Japanese nationality and have lived in Japan for five years or less in total during the preceding ten years, you can fall within Japan’s non-permanent resident rules.

Rental income from real estate located in the United States is foreign-source income.

Therefore, during your non-permanent resident period, Japan’s remittance-based taxation rules need to be considered for U.S. rental income paid outside Japan.

For example:

U.S. tenant
↓
U.S. property management company
↓
U.S. bank account

If the rental income remains outside Japan, the non-permanent resident rules need to be applied to determine the amount taxable in Japan.

On the other hand, if the rent from the U.S. property is paid directly into a Japanese bank account, it is treated as foreign-source income paid in Japan.

And one point is particularly important:

You cannot simply say, “The money I transferred to Japan came from my old savings, not my rental income.”

Your foreign-source income for the year and remittances from overseas to Japan need to be considered together.

For more information, see:
Moving to Japan? How Your U.S. Income Is Taxed in Japan

9. The Tax Treatment Changes After the Non-Permanent Resident Period

Once you are no longer a non-permanent resident, your foreign income is generally within the scope of Japanese taxation regardless of whether it is remitted to Japan.

At that point, saying, “The rent stayed in my U.S. bank account and I did not remit a dollar to Japan,” does not by itself keep the rental income outside Japanese taxation.

For Americans who plan to keep U.S. real estate while living in Japan for the long term, the end of non-permanent resident status is an important point.

For more information, see:
What Happens to Your Japanese Taxes After Living in Japan for 5 Years? A Guide for Americans

10. If Both Countries Tax the Rental Income, Check the Foreign Tax Credit

Under the U.S.-Japan Tax Treaty, the United States can tax income from real estate located in the United States.

At the same time, if you are a resident of Japan, the same rental income can also be subject to Japanese income tax.

This means that the same rental income can be taxable in both countries.

In this situation, you generally consider claiming a foreign tax credit in Japan for U.S. income tax paid on the U.S. rental income.

This is different from the Social Security issue discussed in my article on U.S. Social Security taxation in Japan.

For U.S. Social Security, U.S. taxation of a U.S. citizen can remain because of the treaty’s saving clause.

For U.S. rental property, however, the United States is taxing the income as the country where the real estate is located.

Therefore, the foreign tax credit is generally considered on the Japanese side.

For more information about the Japanese foreign tax credit, see:
Foreign Tax Credit for Non-Permanent Residents in Japan

11. U.S. Tax Paid Is Not Automatically Fully Creditable in Japan

If you paid $1,000 of U.S. income tax, that does not necessarily mean that you can deduct the full equivalent of $1,000 from your Japanese income tax.

Japan’s foreign tax credit is subject to a credit limitation.

In addition, because the United States and Japan can calculate rental income differently:

U.S. taxable rental income does not necessarily equal Japanese taxable rental income.

For example, if depreciation is different in the two countries, taxable income will also be different.

As a result, the U.S. tax paid and the foreign tax credit available in Japan may not match.

12. Example: A Rental House in California

Suppose an American living in Japan owns a house in California that was previously used as a home and is now rented out.

Annual rental income is $30,000.

The U.S. Schedule E shows:

• Rental income: $30,000
• Expenses: $12,000
• Depreciation: $10,000
• Net rental income: $8,000

You do not simply convert the $8,000 into Japanese yen and report that amount as Japanese real estate income.

For the Japanese tax return, you calculate the income again under Japanese tax rules, including:

• rental income;
• management fees;
• repairs;
• property taxes;
• insurance;
• mortgage interest; and
• depreciation calculated under Japanese rules.

The Japanese real estate income might be equivalent to $12,000 instead of $8,000.

It could also be lower than the U.S. amount.

Only after making the Japanese calculation can you determine the Japanese income tax and the applicable foreign tax credit.

13. Selling the U.S. Property Is a Separate Tax Issue

If you sell the U.S. property, the capital gain is a separate issue from the rental income.

Under the U.S.-Japan Tax Treaty, the United States can tax gains from real estate located in the United States.

If you are a resident of Japan, Japan also generally calculates a capital gain on the sale.

If U.S. income tax is imposed on the gain, a foreign tax credit in Japan also needs to be considered.

The purchase price and sale price must also be converted into Japanese yen using the appropriate exchange rates.

As a result, even if the property has not increased much in value in U.S. dollar terms, the taxable gain calculated in Japanese yen can be much larger because of exchange-rate movements.

14. Documents to Keep for Your Japanese Tax Return

If you own U.S. rental property, I recommend keeping the following documents:

• U.S. tax return;
• Schedule E;
• annual rental statement;
• property management statements;
• closing statement from the purchase;
• documents showing the allocation between land and building;
• property tax statements;
• mortgage interest statements;
• insurance statements;
• repair invoices;
• HOA statements;
• documents showing the building’s construction date and structure; and
• records of remittances from the United States to Japan.

Schedule E is very useful.

But Schedule E is not the answer for your Japanese real estate income. It is the starting point for the Japanese calculation.

15. Frequently Asked Questions

Q. My rental property is in the United States. Do I still need to report it in Japan?

Yes, generally. A resident of Japan is generally subject to Japanese income tax on foreign income as well. However, if you are a U.S. non-permanent resident for Japanese tax purposes, the remittance-based taxation rules need to be considered.

Q. Can I use the net income shown on Schedule E for my Japanese tax return?

No. Schedule E is an important source document, but Japanese real estate income must be calculated under Japanese tax law. Depreciation is one of the areas where the calculation can differ significantly.

Q. I already pay U.S. tax on the rental income. Do I have to pay tax again in Japan?

The income can also be taxable in Japan. However, you generally consider claiming a foreign tax credit in Japan for U.S. income tax paid on the rental income. This is how double taxation is generally relieved.

Q. If I leave the rent in my U.S. bank account, can I avoid Japanese tax?

If you are a U.S. non-permanent resident for Japanese tax purposes, the remittance-based taxation rules need to be checked. Once you are no longer a non-permanent resident, simply leaving the money in a U.S. bank account does not keep the rental income outside Japanese taxation.

Q. Is the original purchase price of my U.S. property enough to calculate Japanese depreciation?

Not necessarily. The purchase price generally needs to be allocated between land and building. We also need information such as the building structure, construction date, and acquisition date to calculate depreciation under Japanese rules.

Q. If my U.S. rental property produces a loss, can I deduct it from my Japanese salary?

Not always. Japan has restrictions on offsetting certain losses, including certain interest expenses related to land acquisition and depreciation losses from certain used buildings located outside Japan.

16. A U.S. Tax Return Is Not Something You Simply Translate into Japanese

The important point when preparing a Japanese tax return for someone with U.S. rental property is not to translate the U.S. tax return into Japanese.

We use Schedule E and the underlying documents, and then calculate the income again under Japanese tax law.

I usually check the following items one by one:

• your Japanese tax residency status;
• whether you are a U.S. non-permanent resident for Japanese tax purposes;
• remittances to Japan;
• U.S. rental income;
• expenses deductible under Japanese tax law;
• Japanese depreciation;
• restrictions on losses from certain used overseas buildings;
• U.S. income tax actually paid; and
• the Japanese foreign tax credit.

Even if your U.S. tax return has already been completed, the Japanese calculation is separate.

On the other hand, if you have your Schedule E, property management statements, purchase documents, and other records available, the Japanese calculation becomes much easier to organize.

If you keep U.S. real estate after moving to Japan, understanding this difference from the beginning can prevent a lot of confusion later.

Contact

Koshida Accounting and Tax Office provides Japanese tax return preparation and international tax support for foreign residents, particularly Americans living in Japan.

If you own rental property in the United States and need assistance with Japanese taxation of U.S. rental income, remittance-based taxation, depreciation, or foreign tax credits, please feel free to contact us.

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