Blog

Depreciation cost of property in Japan

In this page, I will explain depreciation cost ( Genka shokyaku hi = 減価償却費 ) of Japan’s property.

In order to success in real estate investment, you need to know about depreciation cost. And even if you purchase real estate for your residence, you need to know about depreciation cost.

Because, when you sell your property in the future, you need to submit tax filing.
In that case, you need to calculate depreciation cost. Otherwise, you can not know if you have made capital gain or not.

In the case you are investing in real estate, by making good use of this depreciation cost, you can reduce taxable income, even if you are a salaried employee or operating other kind of business. Because you can use aggregation of profit and loss.(  損益通算 = Son eki tsu san )

You cannot apply depreciation cost as for lot.

Because no matter how many years you use lot, the value of lot will not decrease.

As for journalization, making an accounting book, you can refer to this page.

Real estate investment and Journalization

Following information is not new one (there were changes in tax law of Japan) 

You can find updated information in this page. “Depreciation of a building in Japan“

Calculation of depreciation cost 

 Residence or second house
（ durable years is 1.5 × durable years of commercial building ）    
Statutory Durable years of  wooden house  : 33 years
depreciation rate in upper case   : 0.031

Statutory  Durable years of  Reinforced concrete : 70 years
depreciation rate in upper case : 0.015

In the case of calculation of durable years of Residence or second house, fraction of more than 6 months shall be assumed as 1 year, fraction of less  than 6 months shall be cut off.

Example
Nancy bought an apartment in  August 2014 and sold in December 2016, in calculation of elapsed years, its elapsed years is 2 years.

 Commercial Building
( Including building for rental. If you purchase an apartment for investment and rent out and someone lives there for her residence, the apartment is  Commercial Building )

Statutory Durable years of  wooden house  :  22 years
depreciation rate in upper case : 0.046

Statutory Durable years of  Reinforced concrete :  47 years
depreciation rate in upper case : 0.022

Example of calculation of depreciation cost

Sales amount : 40 million yen

Break down : Lot : 12 million yen

Building : 28 million yen

In the case of her Residence

Newly built apartment =  not used apartment

Purchased in March, 2010 and Sold in January 2014 = duration : 10 months and 3 years.

In calculation of depreciation cost, duration is 4 years. So, depreciation cost is as below.

Reinforced concrete building : 28 million yen  × 0.9 × 0.015 × 4 years ＝ 1,510,000
yen

Wooden building : 28 million yen  × 0.9 × 0.031 × 4 years ＝ 3,124,800 yen

I have mentioned above about Break down of sales amount, when you sign purchase contract, there is not such break down.

But,you need to break down the sales amount into Lot and Building to calculate depreciation cost.

So, I will explain how to break down the sales amount.

At first you need receive certificate of valuation of property ( Hyoka shomei sho ).

The amount shown in this certificate does not coincide with your purchase price.

Assumed your purchase price is  40 million yen.
And in this certificate, the valuation of building is 10 million yen and the valuation of lot is 20 million yen.
In this case, sales amount of building is 40 million yen × 10 / ( 10 +20 ) = 13,333,333 yen.
( sales amount of lot is 26,666,666 yen. )

If you can add up larger amount as sales amount of building, it will better for you.
Because, when the sales amount of building is larger, the amount of depreciation cost is higher.
Then you can reduce taxable income.
But, if you add up larger amount as sales amount of building, tax agency will file claim against you.
So, you can add up only reasonable amount as purchase amount of building.

When there is description of consumption tax in sales contract, you need to take another calculation formula to break down.

When seller has to pay consumption tax ( Shohi zei ), there is description of consumption tax in sales contract.
If the seller is company or entrepreneur, there is possibility that she has to pay consumption tax.
In this case, the amount of consumption tax is shown in sales contract.

Example

Consumption tax is not levied on lot.
This 800,000 yen is consumption tax for building.
So, when you calculate backward, you can know the sales amount for building.
sales amount for building × 8  % ( tax rate of consumption tax as of 2015 ) = 800,000 yen
→ 800,000 yen ÷ 0.08 = 10,000,000 yen
Then  sales amount for building is 10,000,000 yen.

(You can also see this page. ” How to make Accounting Books for Real Estate Investment in Japan “)

Real estate investment Japan