Cash flow and Depreciation cost of real estate investment in Japan
In this page, I will explain about effect on cash flow caused by depreciation cost.
Depreciation cost ( Genka shokyaku hi ) seems very attractive toward investors.
Because, there is not annual cash out though, but it can be a deductible expense and reduce the amount of income tax.
（ In the case, the real estate is owned by company, it can reduce the amount of corporate tax = Hojin zei. ）
What is depreciation cost
Just in case, I will explain about meaning of depreciation cost.
Assumed that you purchase a scissor of 100 yen. Maybe, durable year of this scissor will be 5 years.
With this scissor, you will operate your business.
Price of this scissor is low. So you can deduct this 100 yen from your annual income at once.
In the case, you buy a computer of 200,000 yen. This price is over 100,000 yen, so you need to depreciate it every year.
In Japanese tax law, statutory durable year ( Hotei taiyo nensu = 法定耐用年数 ) of a computer ( excluding server computer ) is 4 years.
So, you will divide 200,000 yen by 4 years.
200,000 / 4 = 50,000 yen.
So, you can sum up 50,000 yen every year as deductible expense.
And this 50,000 yen is called “depreciation cost = Genka shokyakuhi ( 減価償却費 )”
In case of real estate, statutory durable years is stipulated in tax law.
Statutory durable year is as below ( In case of residential building. Newly built building ).
・ Rein forced concrete construction ( Tekkin concrete ) ： 47 years.
・ heavyweight steels construction ( Juryo tekkotsu zo ) ： 34 years
・ lightweight steels construction ( keiryo tekkotsu zo ) ： 19 year.
・ wooden structure construction ( Moku zo ) ：22 years.
In case of land, you can not depreciate it.
(Regarding using depreciation cost and tax saving in Japan, you can find articles in my website.)
Depreciation cost will effect cash flow of real estate investment
Now, let’s look at effect on cash flow caused by depreciation cost.
Assumed that a person her annual salary income is 10 million yen purchases a real estate in Japan.
The amount of taxable income is assumed to be 7 million yen.
( Because there is a employment income deduction = KYUYO SHOTOKU KOJO etc. )
Income tax rate is 33%.
( tax rate differs depending on the amount of taxable income )
She purchases a building of 100 million yen.
( Price of building is 40 million yen, price of land is 60 million yen. )
Structure : newly built wooden building.
Durable years : 22 years.
Amount of annual rental income : 8 million yen.
( 8 million yen / 100 million yen = Gross yield on investment is 8% ）
Amount of expense to administer this building is assumed to 1.6 million yen.
（ It is 20% of rental income ）
Loan condition ： amount of borrowings is 100 million yen.
Borrowing period : 30 years.
Borrowing rate : 3% ( Fixed interest rate )
|１st year||2nd year||23 rd year|
|① annual amount of rental income||8 million yen||8 million yen||8 million yen|
|② expense||Apartment management fee ( note 1 )||1.6 million yen||1.6 million yen||1.6 million yen|
|Other expenses ( When she purchases a real estate, she needs to pay fee for realtor, judicial scrivener, acquisition tax. The amount of such expenses differs on the amount of purchase price, appraisal value of real estate.)||2 million yen.||0|
|③ profit（①－②）||4.4 million yen.||6.4 million yen||6.4 million yen|
|④ repayment of capital （ She cannot sum up this amount as deductible expense. ）||2.087 million yen||2.15 million yen||4.03 million yen|
|⑤ repayment of interest （ She can sum up this amount as deductible expense. ）||2.97 million yen||2.90 million yen||1.02|
|⑥ repayment of capital and interest（④＋⑤）||5.05 million yen||5.05 million yen||5.05|
|⑦ cash flow before tax（③－⑥）||-1.1 million yen||1.35 million yen||1.35 million yen|
|⑧ depreciation cost||building ( 40 million yen /22 years )||1.8 million yen||1.8 million yen||0|
|⑨ special deduction for a taxpayer who files blue return ( This is not applicable in the case the amount of taxable income is below zero).||0||100,000 yen|| 100,000|
|Taxable income（③－⑤－⑧－⑨）||-748,000 yen|
( She has salaried income. Her gross income tax rate 33%. So, when she purchases this real estate, her taxable income is 7 million yen – 748,000 yen = 6.252 million yen. 748,000 yen × 33% = 246,000 yen. So, about 246,000 is refunded.)
|1.6 million yen||5.28 million yen|
|⑩ real estate income tax ( She is a salaried worker. So, employment income and real estate income shall be consolidated and income tax shall be levied. In this row, only the amount of income tax merged from real estate is specified. Income tax rate differs depending on the amount of total amount of employment income and real estate income. But in this table, tax rate is assumed to be 33%.)||0||528,000 yen||1,742,400 yen|
|cash flow after tax （⑦－⑩）|| -1.1 million yen + 246,000 yen =|
– 854,000 yen
|822,000 yen||– 392,400 yen|
|Remainder of loan||97,912,200 yen||9503.5|
（note 1 : If she orders management company to administer her building, she needs to pay fee of equivalent to 5% of rental fee. When a renter leaves room, she may need to repair wall paper. She needs to pay fee to find next renter. She needs to clean water tank. She needs to paint common area like slope, hall. If there is a elevator, maintenance cost is necessary. If there is a common place, she needs to pay electricity, water fee. She needs to pay maintenance cost to inspect fire prevention equipment. She needs to pay property tax. She needs to pay fee to remove snow, weeds. If she can conduct such task by herself, she can reduce such kind of cost.)
（You can download repayment chart for free at “http://www.rise-estate.com/hennsai50.html” . Please click “住宅ローン返済表 償還表 エクセル版 ダウンロード” button. ）
The amount of cash flow before tax ( ⑦ at above ) will be same during pay-back period.
However, the amount of cash flow after tax will change.
When she repays her loan, the amount of repayment corresponds to interest will decrease and the amount of repayment corresponds to capital will increase.
Repayment corresponds to capital can not be deductible expense.
And it will increase taxable income.
As for “Details of repair cost and depreciation”, you can find articles in my sebsite.
Moreover, after elapse of statutory useful years ( Hotei taiyo nensu ) of real estate, she can not sum up depreciation cost. Then, it will decrease the amount of deductible expense and it will increase the amount of taxable income.
So, I will show you situation of 23 years later.
After 23 years of completion of this building ( In the case, she bought used apartment, duration of useful years of her real estate will become shorter. ) , she can not sum up depreciation cost as deductible expense.
Because, in the case of wooden building for residence, statutory useful years is 22 years.
In 23rd years, she cannot sum up depreciation cost of 1.8 million yen and the amount of repayment of interest is only 1.02 million yen.
So, the amount of taxable income is 5.28 million yen. 😛
Then, the amount of real estate income tax is 1,742,400 yen.
( Though, in fact the amount of her taxable income has increase, rate of income tax may have increased, in this page, rate of income tax is assumed to be 33% always. )
And the amount of cash flow after tax is – 392,400 yen.
As I explained above, when she can not sum up depreciation cost, it will make great impact on the amount of income tax.
In case of used building, durable year is shorter than newly built building.
And timing of such situation will come earlier.
( You can know details of calculation of depreciation cost in case of used real estate in Japan. )
And amount of depreciation cost will also influence in the case she sells her real estate in the future.
So, when you purchase real estate, you need to know these matters and make enough preparation for it.
When she saves enough money during 22 years, or prepares more amount of cash and reduce the amount of loan, she can address this kind of situation.
When you purchase real estate in Japan with my support, I can assist you to manage tax matters.