Taxes on Japanese real estate for foreigners and non-residents: acquisition, holding, and sale
Against the backdrop of a historically weak yen, real estate acquisition in Japan by wealthy overseas buyers is becoming brisk. In Japan, foreigners and non-residents can freely own land and buildings (in principle there are no ownership restrictions based on nationality or residence status). However, a non-resident who has no address in Japan faces a number of tax treatments that differ from those for people living in Japan. This article divides the process of acquiring, holding, and selling Japanese real estate into three phases and organizes the taxes and withholding-tax mechanisms that apply to non-residents, based on primary information from the National Tax Agency.
・Acquisition: real estate acquisition tax, registration and license tax, stamp duty, and consumption tax (buildings only) are the same as for residents
・Holding: if you rent it out, rent is subject to 20.42% withholding tax (when the tenant is a corporation, etc.). Plus the annual fixed asset tax
・Sale: the buyer withholds 10.21% of the price, and the non-resident files capital gains under separate self-assessment taxation (long-term 15.315%)
The premise: what is a "non-resident" / a tax agent is required
For tax purposes, a non-resident is an individual who has no "address" in Japan and, up to the present, has not had a "place of residence" continuously for one year or more (this is judged by the base of one's life, not nationality)[NTA No.2875 (in Japanese)]. Many foreigners who own Japanese real estate while living overseas fall into this category.
For a non-resident to file a tax return and pay tax in Japan, the principle is to appoint a tax agent (tax administrator) resident in Japan (a tax accountant, a management company, etc.) and notify the tax office. The tax agent handles matters such as submitting returns, receiving refunds, and receiving documents from the tax office on your behalf. To make managing and filing for the property go smoothly, it is safest to appoint one at the purchase stage.
Phase 1: taxes at the time of acquisition
The taxes at purchase are the same as for residents even if the buyer is a non-resident. The main ones are as follows[NTA — real estate transactions by non-residents (in Japanese)].
| Tax | Content (statutory rule) |
|---|---|
| Real estate acquisition tax | Fixed-asset-tax assessed value × 4% (with a reduction to 3% for land and housing). Levied by the prefecture after acquisition |
| Registration and license tax | Registration of transfer of ownership: for both land and buildings, assessed value × 2% (reduction measures available). Setting a mortgage is 0.4% |
| Stamp duty | Affixed to the sales contract (from a few thousand yen to several hundred thousand yen depending on the amount) |
| Consumption tax | 10% on buildings only (land is exempt). When the seller is a taxable business. In secondhand sales between individuals, buildings too are often out of scope |
Reduction measures (such as the special provision for registration and license tax on residential buildings) have requirements and deadlines, and some cannot be used for an investment property that is not for your own residence. Please check applicability on a case-by-case basis.
Phase 2: taxes while holding — beware the "20.42% withholding" on rent
While you hold the property, the owner as of January 1 each year is charged fixed asset tax (standard 1.4%) plus city planning tax (up to 0.3%) every year. This is the same for non-residents.
If you rent it out and earn rental income, it becomes the non-resident's real estate income, and a tax return is required in Japan. What matters here is withholding tax.
A person who pays rent for domestic real estate to a non-resident is, in principle, obliged to withhold 20.42% of the payment and remit it to the government[NTA No.2884 (in Japanese)]. However, if the tenant is an individual renting for the residence of themselves or their relatives, no withholding is required. When you rent to a corporation as an office or store, or to a corporation as company housing, 20.42% is deducted at source. The tax deducted at source is settled by the non-resident filing a tax return (real estate income) and deducting expenses (any overpayment is refunded).
Phase 3: taxes at the time of sale — the buyer "withholds 10.21%"
When a non-resident sells Japanese real estate, it is taxed in Japan as capital gains. Here too there is a withholding-tax mechanism.
The buyer withholds 10.21% of the purchase price paid and remits it to the government by the 10th of the following month[NTA No.2879 (in Japanese)]. This is a system to secure capital gains taxation before the funds leave for overseas. However, when the buyer is an individual who acquires the property for the residence of themselves or their relatives, and the price is ¥100 million or less, no withholding is required.
On the gain from sale (sale price − acquisition cost − transfer expenses),
・Long-term transfer (held more than 5 years): 15.315% (income tax 15% + special reconstruction income tax 0.315%)
・Short-term transfer (held 5 years or less): 30.63% (income tax 30% + reconstruction 0.63%)
Residence tax is not imposed on non-residents (because they have no address in Japan on January 1). On this point the burden is lighter than for residents (long-term 20.315%, short-term 39.63%) by the amount of residence tax.
The 10.21% deducted first from the purchase price is a "prepayment," so the non-resident settles it against the actual tax amount by filing a tax return (Feb 16 – Mar 15). In cases where the acquisition cost is high and the gain from sale is small, much of the withheld amount may be refunded. Because it is not settled and the withheld tax simply stays withheld if you do not file, treat filing as mandatory.
Beware of inheritance and gifts too: Japanese real estate is taxed under the "location principle"
It is often overlooked, but real estate located in Japan is subject to Japanese inheritance tax and gift tax even if the owner is a non-resident foreigner. This is because inheritance and gift tax are judged by the "location of the property," and real estate located in Japan is subject to Japanese taxation. This becomes an issue in cases such as inheriting a Japanese property from a parent living overseas. The way the scope of taxation is considered based on nationality, address, and period of residence is explained in Foreigners and inheritance tax.
Comparison with related forms of investment
The taxation changes greatly depending on whether you hold Japanese real estate directly as an individual, hold it through a Japanese corporation (a real-estate-holding company), or buy the whole company that holds the real estate. When you acquire the whole company (its shares), other issues arise — for example, shares of a company that holds a lot of Japanese real estate are treated as real-estate-rich shares, so capital gains taxation can reach non-residents too. For acquiring a company, see Tax on M&A of Japanese companies (share acquisition); for the taxes of rental operation in general, see Taxes on real estate investment. If you lend the property short-term as a minpaku, Minpaku and taxes is also a useful reference.
Summary
FAQ
Can a foreigner (non-resident) buy Japanese real estate? Is a residence status required?
Yes, you can. In Japan there are in principle no restrictions on real estate ownership based on nationality or residence status, and you can purchase and register even while living overseas. However, for filing and paying tax after purchase, the principle is to appoint a tax agent resident in Japan and notify the tax office.
Why is 20.42% deducted when I rent out a Japanese property and receive rent?
Because the payer of rent for domestic real estate to a non-resident has a 20.42% withholding obligation. It is a system to reliably collect the income tax of a landlord who is overseas. However, if the tenant is an individual renting for the residence of themselves or their relatives, no withholding is required. The amount deducted at source is settled by filing a tax return and deducting expenses, and any overpayment is refunded.
When I sold, 10.21% of the price was deducted. Can I get it back?
The 10.21% is a prepayment of capital gains tax (withholding). In the following year's tax return (February 16 – March 15), it is settled against the actual tax amount after deducting the acquisition cost and transfer expenses. If the gain from sale is small, much of the withheld amount may be refunded. Because it is not settled unless you file, be sure to file.
Does a non-resident pay residence tax?
No. Because residence tax is imposed on a person who has an address in Japan on January 1 each year, it is not levied on non-residents. As a result, the tax rate on a real estate gain is 15.315% (long-term), lower than for residents who pay residence tax (long-term 20.315%) by the amount of the residence tax.
Reference links (sources)
This article is based on the following official materials (neutral, primary sources).
- National Tax Agency — On taxes when a non-resident or foreign corporation transacts in real estate located in Japan (in Japanese)
- National Tax Agency — Tax Answer No.2875 Distinction between residents and non-residents (in Japanese)
- National Tax Agency — Tax Answer No.2884 Withholding on real estate rent (non-residents) (in Japanese)
- National Tax Agency — Tax Answer No.2879 Withholding when purchasing real estate from a non-resident (in Japanese)
* This article is general information, not tax advice. Tax rates, reduction measures, and requirements may be amended, and treatment may change under a tax treaty. For decisions on specific matters, please confirm with a tax office or a tax accountant or other professional well-versed in international taxation.