Rental Property Taxes in Japan: Income Tax, Expenses, 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 rental properties in Japan. The weak yen has been one reason, and some investors are also considering Minpaku (private lodging) businesses.

However, the tax treatment differs depending on how the property is used. Income tax or corporate tax applies to profits from the rental business, while the consumption tax treatment differs significantly between residential property, land, and property rented for business use.

In this article, I will explain the basic tax treatment of running a rental property business in Japan, including deductible expenses, depreciation, and consumption tax.

1. Income Tax and Corporate Tax on Rental Property Profits

Profits from a rental property business are generally calculated by subtracting deductible expenses from rental income.

If the property is owned by a company, the effective corporate tax rate is generally around 30%, although the actual rate depends on factors such as taxable income, capital, and location.

For an individual, the tax rate varies according to the person’s total taxable income. Including local inhabitant tax, the combined rate can range from approximately 15% to more than 50% depending on the income level.

This difference between individual and corporate taxation can become important when considering whether to own and operate rental properties personally or through a company. For a growing property business, the ownership structure can therefore be an important part of tax and corporate tax planning in Japan.

2. Deductible Expenses and Depreciation

Typical expenses related to a rental property business may include management fees, repairs, insurance, property-related taxes, interest on business loans, professional fees, and depreciation, depending on the circumstances.

Depreciation is particularly important because the purchase price of a building is generally not deducted as an expense all at once. Instead, the depreciable cost of the building is allocated over its applicable useful life under Japanese tax rules.

The depreciation period depends on factors such as the type of building, its structure, age, and whether it was purchased new or used. In practice, this can have a significant effect on the taxable profit from a rental property.

It is also important to separate the cost of the land from the cost of the building because land is not depreciated.

Proper accounting in Japan is therefore important for a property rental business, particularly when recording the acquisition cost of a property and calculating depreciation and deductible expenses.

If you operate the rental property business as an individual, the Blue Form Tax Return (Aoiro Shinkoku) may also provide important tax benefits if the applicable requirements are met. For more details, please see Blue Form (Aoiro Shinkoku) in Japan: Benefits and Deadlines.

3. Consumption Tax on Rental Properties

The consumption tax treatment of rental income depends on how the property is used.

Rent from residential property is generally exempt from Japanese consumption tax. Rent for land is also generally exempt, subject to certain exceptions.

On the other hand, rent from property used for business purposes, such as offices and shops, is generally subject to Japanese consumption tax at the standard rate of 10%.

This distinction is important not only when receiving rent but also when considering the consumption tax treatment of expenses and property purchases. For example, the tax consequences of purchasing a property for residential rental use can be quite different from purchasing a property that will generate taxable business rental income.

For this reason, consumption tax should ideally be considered before purchasing a property rather than only after the rental business has started.

Q&A: Is It Better to Own a Rental Property Personally or Through a Company?

There is no single answer that applies to every property owner.

For an individual, rental profits are generally combined with other taxable income, so the applicable income tax rate can increase as total income rises. A company is taxed under corporate tax rules and may provide more options for managing expenses and compensation, but it also creates additional accounting, tax filing, social insurance, and administrative costs.

In practice, I think it is better to compare the expected rental profit, your other income, future property purchases, financing, and long-term plans rather than deciding only by comparing headline tax rates.

If the rental business is expected to grow, it can be useful to make this comparison before purchasing additional properties because changing the ownership structure later may itself create tax and transaction costs.

Q&A: Should I Separate the Land and Building Costs in My Accounting Records?

Yes. This is important because land and buildings receive different tax treatment in Japan.

A building is generally depreciated over its applicable useful life, while land is not depreciated. The allocation can also be relevant when considering consumption tax and the tax treatment of a future sale.

For this reason, I recommend keeping the land and building amounts clearly separated in the accounting records from the time the property is purchased.

4. Related Taxes When Buying or Selling Property

Rental income is only one part of the taxation of a property investment in Japan. Different taxes may arise when you purchase, own, rent, and eventually sell the property.

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

If you are considering selling property held by a business, please also see Taxes When Businesses Sell Real Properties in Japan.

Property businesses also generate many accounting records, including invoices, receipts, management statements, and electronic transaction records. If you keep business documents electronically, please also see Japan’s Electronic Record Keeping Law: A Practical Guide for Businesses.

5. Tax and Accounting Support for Property Businesses in Japan

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

For property businesses, proper accounting is particularly important because the tax treatment can differ depending on the use of the property, the allocation between land and building, depreciation, deductible expenses, and whether the owner is an individual or a company.

We can assist with bookkeeping, Japanese tax returns, accounting, and tax planning for property businesses. English support is available for foreign clients who find accounting or tax procedures in Japan difficult to understand.

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

If you are considering purchasing or operating a rental property in Japan and would like professional accounting and tax support, please feel free to contact us through the inquiry form.