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Repair cost and Capital expenditure in real estate investment in Japan

Repair cost and Capital expenditure in real estate investment in Japan

Repair cost should be depreciated every year

By reading through this page, you can greatly reduce the amount of real estate income tax in Japan. At the time of investing  in a building apartment or house in Japan, they starts aging. Or she ( Investor = owner of a property ) may purchase a very old real estate and needs to repair it before she uses. But, before she repairs her property, she needs to know about taxation relating repair cost in Japan. Otherwise, she has to pay extra real estate income tax in Japan. She may think that if she pays some money to repair her real estate, she can deduct the amount of her payment from sales at once. For example, in the case she pays 300,000 yen to repair her real estate, if she can put it down to expense ( Keihi = 経費 ) , she can reduce the amount of taxable income. But depending on the situation, she can not down the amount of her payment to expense. If she is not able to do so, the amount of her payment is deemed to be capital expenditure ( = CAPEX = capital spending = 資本的支出 ) . And in the case of capital expenditure, depreciation ( Genka shokyaku = 減価償却 ) is required. And it will increase the amount of taxable income.

Capital expenditure, it will increase the amount of  tax relating to property.

In  the case she ( Investor ) pays money to repair wall paper or floor inside a room, she can down the amount of her payment to expense and deduct the amount of her payment from her sales and reduce the amount of taxable income. But in the case she changes floor plan or repair outer wall of apartment building, depending on the situation, she can not sum up the cost as deductible expenditure. And she needs to sum it up as capital expenditure. I will take up an example. Assumed that one of her renter leaves her room.  She pays 300,000 yen to repair wall paper inside the room and floor. If her payment is deemed to be deductible expenditure, she can reduce the amount of taxable income and reduce the amount of corporate tax. However, if her payment is deemed to be capital expenditure, she can not deduct the amount of her payment from her sales at once. In the case she repairs foundation of building or crack on outer wall, it will lengthen durable years of her building. So, if she has paid 300,000 yen to do so, she needs to depreciate 300,000 yen every year according to depreciation rate. This depreciation rate of her payment differs depending on statutory durable years of building. For example, statutory durable years of rein forced concrete is 47 years. So, if she repairs foundation of rein forced concrete building and her payment is deemed to be capital expenditure, she needs to depreciate 300,000 yen for 47 years. Even if her building is 27 years old at the time of her repair, she needs to depreciate her payment  for 47 years. In the case the amount of her payment is 300,000 yen, she can deduct only about 6,300 yen every year. ( 300,000 yen / 47 = 6382 yen. Roughly speaking. ) With this small amount of money, she can not reduce the amount of taxable income adequately. So, she needs to avoid such situation.

Condition of capital expense

In the case she owns real estate for investment and pays money to repair her real estate in Japan, she needs to know what kind of expenditure is deemed to be capital expenditure. There are some conditions to identify the category of her payment. If the amount of repair cost  is below 200,000 yen, her payment is deemed to be ordinary repair cost. So, she can sum up the cost as deductible expense and can deduct the repair cost from her income at once. If the amount of repair cost is over 200,000 yen but if she needs to perform this repair every 3 years ( It means this repair is ordinary action. ), her payment to repair is deemed to be ordinary action and her repair cost is deemed to be  ordinary repair cost. So, she can sum up the cost as deductible expense and can deduct the repair cost from her income. If the amount of repair cost is over 200,000 yen and she does not need to perform this kind of repair every 3 years ( It means this repair is extraordinary action. ), but her repair does not increase value of her property, her payment to repair is deemed to be ordinary action and her repair cost is deemed to be  ordinary repair cost. So, she can sum up the cost as deductible expense and can deduct the repair cost from her income. If her performance of repair lengthen durable years of her property, it means the repair increases value of her property and she cannot deduct the amount of her repair cost from income at once. And she needs to depreciate her repair cost every year for several years.

Conclusion

That is to say, if she pays some money to restore to previous condition, her payment is deemed to be ordinary repair cost and she does not need to depreciate it. And if she pays some money to restore her property to better condition than before, she needs to depreciate her payment. In the case she invested in reinforce concrete building 25 years ago. Outer wall is spraying. But now she reforms her building and change outer wall with tiling, it costs 3 million yen. In this case, her payment is deemed to be capital expenditure and depreciation is necessary. Because, the amount of her payment is over 200,000 yen and she does not need to change outer wall every 3 years and she increases value of her building. On the contrary, in the case she repairs outer wall with spraying and it costs 2 million yen, her payment to repair is deemed to be ordinary repair cost and does not need to depreciate it. There are some vague cases to distinguish ordinary repair cost or capital expenditure. So, before you repair your property in Japan, you need to consult with tax agency or tax accountant ( Zeirishi ) in japan. When you invest in real estate in Japan, you need to reserve money for future repair. But, unfortunately you can not deduct the amount of money reserved from your income. Because, you still do not use it.

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