Taxes When Selling Real Estate in Japan: Individuals, Companies, and Consumption Tax

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

I assist foreign individuals and business owners with accounting and tax matters in Japan, including Japanese tax returns and accounting for businesses.

In recent years, I have seen more foreign individuals and companies become interested in purchasing real estate in Japan. The weak yen has been one reason, and some investors have also entered businesses such as Minpaku (private lodging).

When you eventually sell a property in Japan, the tax treatment depends on several factors, including whether the owner is an individual or a company, how long an individual has owned the property, and how the sales price is allocated between land and buildings.

In this article, I will explain the basic Japanese tax treatment when real estate is sold, including the calculation of gains, individual and corporate tax rates, depreciation, and consumption tax.

1. How to Calculate the Gain or Loss on a Property Sale

The gain or loss on the sale of real estate is generally calculated by subtracting the property’s acquisition cost and selling expenses from the sales proceeds.

For a building, the acquisition cost used in this calculation is reduced by the depreciation attributable to the period during which the building was owned. As a result, accumulated depreciation generally reduces the remaining tax basis of the building and can increase the taxable gain when the property is sold.

Land is treated differently because land itself is not depreciated.

This is one reason why it is important to keep clear accounting records showing the original purchase price, the allocation between land and building, acquisition-related costs, depreciation, and selling expenses.

If you operate the property as a rental business before selling it, depreciation and other accounting records accumulated during the rental period can directly affect the gain recognized on the eventual sale. For more details, please see Rental Property Taxes in Japan: Income Tax, Expenses, and Consumption Tax.

Because purchase costs, depreciation, improvements, and selling expenses may affect the taxable gain many years later, keeping proper accounting records from the time of acquisition is important. For more information, please see Key Points to Consider When Maintaining Accounting Records in Japan.

2. Tax Rates When Individuals Sell Real Estate

For individuals, the tax rate depends largely on how long the property has been owned.

If the property has been held for more than five years as of January 1 of the year in which it is sold, the gain is generally treated as a long-term capital gain. The basic combined income tax and inhabitant tax rates are approximately 20%.

If the property has been held for five years or less as of January 1 of the selling year, it is treated as a short-term capital gain, and the basic combined rate is approximately 39%.

A special reconstruction income tax is also added to the income tax portion.

Therefore, the timing of a sale can sometimes make a significant difference to the tax burden for an individual property owner.

An individual who has a taxable gain from the sale of real estate generally needs to report the transaction in a Japanese income tax return (kakutei shinkoku / 確定申告). The property sale is calculated separately from ordinary income for tax rate purposes, but it is reported through the annual tax return.

Q&A: Can Changing the Timing of a Property Sale Reduce the Tax Rate?

Sometimes, yes.

For an individual, the five-year ownership test is based on the ownership period as of January 1 of the year of sale, not simply on whether five calendar years have passed since the purchase date.

Because of this rule, selling a property near the boundary between short-term and long-term ownership can produce a very different tax result depending on the year in which the sale takes place.

If you are close to the five-year threshold and have flexibility over the timing of the sale, I recommend checking the applicable ownership period before signing the sales contract.

Checking the ownership period before deciding the year of sale can therefore be an important part of legitimate tax planning in Japan.

3. Tax Treatment When Companies Sell Real Estate

For a company, the gain or loss from the sale of real estate is generally included with the company’s other business profits and losses when calculating taxable corporate income.

Japan’s effective corporate tax rate is generally around 30%, although the actual rate depends on factors such as taxable income, capital, company size, and location.

For a more detailed explanation of Japanese corporate tax rates, please see Japan Corporate Tax Rate Explained.

Unlike the separate long-term and short-term capital gain rates that apply to individuals, a company’s property gain is generally included in its overall corporate taxable income.

For this reason, the expected timing of a property sale, other business profits or losses, and the company’s overall financial results can be relevant when considering corporate tax planning in Japan.

Q&A: Does a Company Pay Tax on the Property Sale Separately from Its Other Business?

Generally, no.

For a company, the gain or loss from selling real estate is generally included together with the company’s other taxable business results.

This means that the tax impact of selling a property should not always be considered in isolation. For example, if the company expects unusually high profits or losses from other activities in the same fiscal year, the overall tax result may differ.

In practice, I think it is better to look at the company’s annual profit forecast before deciding on the timing of a large property sale whenever the timing can be controlled.

4. Consumption Tax on the Sale of Real Estate

For consumption tax purposes, it is important to separate the sales price of land from the sales price of buildings because they receive different tax treatment in Japan.

– Land

The sale of land is generally exempt from Japanese consumption tax.

This reflects the nature of consumption tax: the transfer of land itself is treated as a non-taxable transaction for consumption tax purposes.

– Buildings

The sale of a building used in a business is generally subject to Japanese consumption tax if the seller is a consumption-taxable business.

The standard consumption tax rate is 10%.

This means that when land and a building are sold together, the allocation of the sales price between the land and the building can be important because the land portion is generally exempt from consumption tax while the building portion may be taxable.

The allocation should therefore have a reasonable basis and should be supported by the relevant documents and circumstances.

Q&A: Why Is the Allocation Between Land and Building Important When Selling Property?

Because land and buildings receive different consumption tax treatment in Japan.

The sale of land is generally exempt from consumption tax, while the sale of a business-use building may be subject to consumption tax if the seller is a taxable business.

Therefore, when a property consisting of both land and a building is sold for one total price, the allocation between the two can affect the amount of consumption tax.

For this reason, I recommend keeping a reasonable basis for the allocation rather than deciding the amounts arbitrarily only when preparing the tax return.

5. Related Taxes on Purchasing and Renting Property in Japan

Selling a property is only one stage of a real estate investment. Different Japanese taxes and accounting issues arise when a property is purchased, held, rented, and eventually sold.

For taxes and costs that may arise when acquiring real estate, please see Taxes When Purchasing Real Property in Japan.

If you plan to operate the property as a rental business before selling it, please also see Rental Property Taxes in Japan: Income Tax, Expenses, and Consumption Tax.

6. Tax and Accounting Support for Property Owners in Japan

Koshida Accounting and Tax Office provides accounting and tax services in Japan for foreign individuals, entrepreneurs, and small businesses.

When real estate is involved, proper accounting records are particularly important because acquisition costs, depreciation, the allocation between land and buildings, selling expenses, and past accounting treatment can affect the tax calculation when the property is eventually sold.

We can assist with bookkeeping, Japanese tax returns, accounting, and tax planning related to property businesses. For companies, we can also consider the timing of major transactions as part of corporate tax planning in Japan.

English support is available for foreign clients who find Japanese tax and accounting procedures difficult to understand.

Our office also works with other specialists when clients need assistance outside tax and accounting, including legal matters, company registration, visas, and social insurance.

If you are planning to purchase, rent, or sell real estate in Japan and would like professional accounting and tax support, please feel free to contact us through the inquiry form.