By Jeff Wynkoop
If you want to buy a residence to live in Japan, one question always comes up: how much tax relief will I get?
The reason this is a complicated discussion is that the amount of your allowable tax deduction in a given year changes depending on your individual circumstances. There are many different factors that come into play such as the (always changing) year-end balance of your mortgage loan and the actual amount of Japanese income tax you pay for that year.
Basic Rules for Home Loan Deductions
The basic rule is that for ten years after you receive your loan, you are allowed to deduct up to 1% of the year-end balance on your loan, up to a maximum of 400,000 yen a year or up to 4 million yen in total over the ten-year period. This is provided, however, that you buy the house to live in by June 2019.
Also, please keep in mind that to receive the benefit of the deduction, you have to file a Japanese income tax return. This means for employees in Japan who have their income tax taken directly out of their monthly income, they may be able to receive money back based on their income tax filing.
This seems simple, right? For instance, in general if you have a mortgage loan balance of at least 40 million yen, and you pay sufficient Japanese income tax, you can deduct 400,000 yen for that year.
However, every year the amount of your year-end loan balance goes down, and once it goes under 40 million yen, you can only deduct 1% of that amount (so if the year-end loan balance were 30 million yen in a given year, you can only deduct up to 300,000 yen for that year).
Having sufficient income tax liability
And of course, you have to have enough tax liability to receive the maximum benefit (i.e., you have to have at least 300,000 yen tax liability for that year).
An added complication here is that if you don’t have enough income tax liability to fully benefit from the deduction in a given year, you can use the remainder of the deduction for relief from the local inhabitants tax (住民税). However, there is an upper limit to how much you can use the deduction against your local inhabitants tax liability as well (the lower of either 7% of your total income tax basis for that year or 136,500 yen).
Maximum deduction for a “Certified Long-Term Valuable Residence”
Furthermore, if the residence is a ‘certified long-term valuable residence’ (認定長期優良住宅, meaning the house has passed certain earthquake-resistance, durability, and eco-friendly tests), or in the event the house is a ‘certified low-carbon residence’ (認定低炭素住宅), the maximum amount of the yearly deduction is not 400,000 yen, but up to 500,000 yen per year or up to 5 million yen over the ten-year period.
In the event the year-end balance of the loan is 30,000,000JPY.
(30 million x 1% is the upper limit of the deduction, so 300,000JPY is allowable for that year)
In the event your income tax liability for that year is 120,000JPY.
(The total 120,000JPY is deductible. The upper limit, 300,000JPY, minus the deducted 120,000JPY, equals 180,000JPY, meaning there is still 180,000JPY of possible leftover deduction from inhabitants tax liability)
The lower of either 7% of your total income tax basis for that year or 136,500JPY is deductible from this remaining 180,000JPY for inhabitants tax purposes.
It is important to note that there are many other legal conditions to being allowed to use the mortgage loan deduction in Japan, for example, there must always be at least 10 years left on the loan. (If you make accelerated payments on the loan, you may not be able to use the full ten years of possible deductions.)
You must begin to live in the residence at least 6 months after purchase, and the borrower cannot make more than 30 million yen income a year.
The residence must also have at least 50 sq. meters of livable space, and at least half of the space used as your actual residence.
In addition, please keep in mind that on top of the above conditions, there are also special restrictions to using the mortgage loan deduction when buying a used residence or buying a house for your own refurbishment.
You may also be interested in: Basic Requirements for Getting a Mortgage as a Foreigner in Japan