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When considering buying Japanese real estate, it is important to think about the tax implications of the purchase, not just the purchase price and any possible investment returns.
Your initial financial due diligence may consist of estimating the acquisition tax, future fixed asset tax or looking at the rent rolls, for example. If you are considering holding the property long term, however, it is essential to consider the financial implications for your family, specifically inheritance tax.
In this article, we give a brief overview of the Japanese inheritance tax system and the tax implications for heirs when a Japanese property owner passes away. Our article sponsor, Plaza Homes is a bilingual real estate brokerage with over 50 years experience in the greater Tokyo area.
How are heirs taxed in Japan?
Unlike in many other countries, in Japan, heirs themselves are taxed, not the estate. In addition, the number of heirs affects the overall tax calculation.
The total amount due is calculated based on the statutory amount due to each heir, irrespective of whether the heir receives that amount or not. So even if someone is cut out of a will, they are still liable for inheritance tax.
It is possible to file separate inheritance tax returns, but it is customary for one inheritance tax return to be filed for all heirs. The filing deadline is ten months after the date of death or ten months after the date that you learned that you have an inheritance tax filing requirement.
Heirs who have acquired real estate in Japan by inheritance are required to apply for inheritance registration within three years from the date of knowing that they have acquired such ownership.
Statutory heirs
In Japan, statutory heirs always include the surviving spouse, and generally, it is not possible to disinherit your spouse.
Following your spouse, the following succession rules apply:
- First line of succession: Your Children
- Including adopted and biological children
- Children born outside of the marriage generally have the same inheritance rights as legitimate children.
- Second line of succession: Your Parents
- If your parents have pre-deceased you, then the rights to your inheritance go to your grandparents, and if your parents and grandparents have already passed away then the rights to your inheritance go to your great-grandparents.
- Third line of succession: Your Siblings
- If your siblings have pre-deceased you, then your inheritance is passed on to your nieces or nephews.
If you die without heirs, the court will appoint an administrator of inherited property to manage your estate and determine heirship and asset distribution.
How is inheritance tax calculated?
Once the number and nature of statutory heirs is determined, the aggregated tax base (the gross value of assets subject to inheritance tax less deductions) is then divided among all statutory heirs.
The tax rate is not applied to the gross aggregated tax base but to the fraction received by each heir. This means that if there is more than one statutory heir, the rate will likely be lower.
The table below shows how the inheritance tax is applied to each total.
Available deductions
Here are some of the basic deductions available to apply to inheritance tax:
- Basic exemption
- The amount of basic exemption is ¥30 million plus ¥6 million multiplied by the number of statutory heirs.
- Life insurance
- The amount of exemption is ¥5 million multiplied by the number of statutory heirs.
- Mortgages on real estate
- Mortgage from real estate properties can be deducted from the assessed property value. If you have a large amount of mortgage and pass it on to your heirs, you can get a very low or negative property value when it comes to gift or inheritance taxes.
- Minors credit
- ¥100,000 multiplied by the heir’s age for minor heirs under the age of 18.
- Disability credit
- ¥100,000 multiplied by the heir’s age (for heirs with disabilities ¥200,000 for special disabilities).
- Foreign tax credit
- A foreign tax credit may be available if the same asset is also taxed in other tax jurisdictions.
- Spousal credit
- No Japanese inheritance tax will be imposed on amounts that the spouse receives up to the greater of: (1) the spouse’s statutory share of the total taxable assets (typically 50%), and (2) ¥160 million.
Valuation of assets, particularly real estate
Assets are generally valued at the fair market value on the date of death. However, there are special tax valuation rules for certain assets, notably real estate.
The land valuation uses a roadside land valuation, known as rosenka (路線価) in Japanese. The Japanese National Tax Agency publishes this value on July 1; the value is renewed once every 3 years. This roadside land valuation is said to be roughly 80% of fair market value, but even more discount is available for the land depending on size and usage.
The property valuation for tax purposes is equivalent to its property tax assessment value, which is roughly 70% of fair market value.
This means that Japanese real estate is considered a key component in Japanese estate tax planning due to its reduced tax valuation.
Considerations for foreign nationals
In general, directly held real estate is considered a Japan situs asset, which means that it would be subject to Japanese inheritance tax upon the owner’s death. The applicability of the Japan inheritance tax to other assets held by the owner will be dependent on the owner’s/heir’s domicile, nationality, Japan visa type, and time spent in Japan on the date of death.
For non-resident individuals who have no ties to Japan aside from real estate, one planning idea to consider would be to set up an offshore entity to purchase the Japan property. That way, the property is owned by a non-Japan entity, and thus making this a non-Japan situs asset.
This article only provides a brief overview of the inheritance tax considerations in Japan. For more in depth information, please see the source article from Plaza Homes.
Plaza Homes
