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How to reserve a fund for future repair of real estate in Japan without paying income tax

How to reserve a fund for future repair of real estate in Japan without paying income tax

Preparation of fund for future repair of real estate is Necessary

By reading through this page, you can know method to prepare fund by saving tax in Japan. In the case a person ( landlord = investor = owner of real estate ) invests in real estate in Japan and continues her investment in good condition, she needs to maintain her real estate. If one of renter leaves her room, she may change wall paper inside the room or repair minor defect and she can include her payments in deductible expenses at her fiscal year. On the other hand, even if she invests in newly built apartment, she may need to conduct large scale repair after 10 years. So, she wants to reserve some fund for upcoming large scale repair. When a elevator gets old, she will repair it. Or when outer wall of her property gets old, she will renovate it and tries to attract new renters. Or when floor plan of her building apartment has become obsolete, she needs to change it. So,  she wants to reserve some funds for upcoming renovation or repair. But, even if she wants to reserve the fund, she still has not paid her money. So, she cannot include the money in deductible expense. She needs to reserve some fund for upcoming large scale repair after she pays real estate income tax. But now I will introduce a way to avoid such situation by using life insurance in Japan.

Life insurance for real estate investment

She can utilize a kind of life insurance in Japan. There is a life insurance that she can deduct all amount of premium from her sales. At the same, when she cancels her insurance, most of her premium is reimbursed to her.

Her company can purchase life insurance for tax saving purpose

At first she needs to incorporate a company ( she is a representative director  ) in Japan and her company should invest in real estate in Japan. If she already owns real estate in Japan by herself, she needs to transfer the ownership of the property to her company. Then, her company  purchases life insurance and she is a insured person. Assumed she ( representative director of her company and insured person ) is 30 years old and her company pays premium for 15 years and cancels its insurance when she is 45 years old. In this case, 80% of its premium is reimbursed. ( Actually there is this kind of life insurance in Japan as of September 2015. I can introduce a bilingual employee of insurance company.) Assumed, her company invests in real estate in Japan but does not purchases life insurance. And annual amount of her real estate sales is 10 million yen and effective tax rate ( = Jikko zeiritsu = 実効税率. It includes corporate tax, resident tax, business tax ) is  35% .
1st year 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Amount of real estate income 10 million 10 million 10 million 10 million 10 million 10 million 10 million 10 million 10 million 10 million 10 million 10 million 10 million 10 million 10 million
Corporate tax etc 3.5 million 3.5 million 3.5 million 3.5 million 3.5 million 3.5 million 3.5 million 3.5 million 3.5 million 3.5 million 3.5 million 3.5 million 3.5 million 3.5 million 3.5 million
 Profit after tax  6.5 million yen  6.5 million  6.5 million  6.5 million  6.5 million  6.5 million  6.5 million  6.5 million 6.54 million  6.5 million  6.5 million 6.5 million  6.5million 6.5 million 6.5 million
So, during 15 years, she can reserve  97.5 million yen. ( 6.5 million yen × 15 years = 97.5 million yen. ) On the other hand, in the case her company invests in real estate in Japan and purchases life insurance ( annual amount of premium is 2 million yen ) by her company and annual amount of her real estate sales is 10 million yen and effective tax rate  35%.
1st year 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Amount of real estate income 10 million 10 million 10 million 10 million 10 million 10 million 10 million 10 million 10 million 10 million 10 million 10 million 10 million 10 million 10 million
Amount of premium 2 million yen 2 million 2 million 2 million 2 million 2 million 2 million 2 million 2 million 2 million 2 million 2 million 2 million 2 million 2 million
Taxable income 8 million yen 8million 8 million 8 million 8 million 8 million 8 million 8 million 8 million 8 million 8 million 8million 8 million 8 million 8 million
Corporate tax etc.  2.8 million yen 2.8 million  2.8 million  2.8 million  2.8 million  2.8 million  2.8 million  2.8 million 2.8 million 2.8 million  2.8 million 2.8 million  2.8 million 2.8 million 2.8 million
Profit after tax 5.2 million yen 5.2 million 5.2 million 5.2 million 5.2 million 5.2 million 5.2 million 5.2 million 5.2 million 5.2 million 5.2 million 5.2 million 5.2 million 5.2 million 5.2 million
5.2 million yen ( Profit after tax ) × 15 years = 78 million yen. 2 million yen ( Amount of premium ) × 15 years × 80% = 24 million yen. 78 million yen + 24 million yen = 102 million yen. So, during 15 years, she can reserve  102 million yen. 102 million yen - 97.5 million yen = 4.5 million yen. So, by purchasing a life insurance, she can reserve more money by 4.5 million yen.   And according to her condition, she can purchase insurance with higher cancellation return rate and can cancel insurance within shorter years. In the case of her, her company cancels insurance and receives 24 million yen. Her company needs to cancel its insurance when it uses the money to repair or remodel its building apartment or purchase other real estate or has other purpose. Because, this 24 million yen is miscellaneous revenues ( zatsu shunyu = 雑収入 ). So, if  her company does not use this money, it will increase taxable income. She needs to cancel the insurance when she has intention to use the reimbursed money.

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