By Jeff Wynkoop
The National Tax Agency (“NTA”) recently published its 2018 Roadside Land Values (路線価 or rosenka) for calculating inheritance and gift tax when ownership in land is transferred, and values were up 0.7% on average nationwide in the last year.
However, since rosenka values are calculated based on ‘typical’ parcels of land in a certain area, upon actually calculating it out for your property, you may find the potential inheritance tax liability for your property went down in 2018, while rosenka values in your area are up. What gives?
Lowering your tax assessment
Since rosenka values are calculated based on a typical or standard parcel of land in a certain area, you may be able to benefit from a lower tax assessment if your land has features that make it harder to develop than what is deemed “typical” in the area. For instance, if your parcel has an odd shape or is on an extreme slope, the rosenka basis for the property may be revised downward by the NTA based on details of your tax filing. One category for this downward revision is if a parcel of land is “too big”, that is, if it is so big that efficiently developing and using all of the land is very difficult. However, these specific grounds for a tax reduction are not applicable to land that is deemed “suitable for development of a midsized residential building.” In the last few years, many taxpayers have had their applications rejected and then complained the tax rules for determining whether a parcel is “suitable for development of a midsized residential building” are too vague, so the NTA clarified the rules earlier this year.
New tax rule for parcels deemed “too big”
The new tax rule for land that is “too big” and not “suitable for development of a mid-sized residential building” is that in the three main Japan metropolitan areas, the parcel must be at least 500 square meters in area, have a floor area ratio (“FAR”) not more than 400% (or not more than 300% in Tokyo’s 23 wards), and be in a specific zoning district (either in one of the many residential zones or in a residential/business zone) to qualify for a reduction.
If the property has a FAR less than 400% (or 300% in Tokyo), and meets the other conditions, the NTA considers the property not suitable for a mid-sized residential building, and the reduction is allowed.
Importantly, this opportunity for a tax reduction applies both to vacant land and even to land where there is a mid-sized residential building already constructed on the site.
The percent of rosenka reduction varies with the size of the parcel, and the larger the parcel, the higher percentage of reduction is possible. For properties 500-5000 sq. meters in size, a 20% reduction is possible, for properties 5000-20,000 sq. meters in size, a 28.4% reduction is possible, and for a parcel of land over 20,000 sq. meters, a 34.1% reduction is possible. For a typical residential building, this can create a significant reduction in the tax basis on the land that comes with ownership of a unit in the building, more than compensating for a 1-2% jump in the underlying rosenka.
So, how many properties in Tokyo could benefit from this rosenka reduction? According to Tokyo Kantei, a leading Japanese real estate consulting firm, there are almost 700 condo buildings alone in Tokyo’s 23 wards that may qualify. Nevertheless, this number may greatly understate the actual number, since Tokyo Kantei does not have a complete list of all the FAR numbers for all condo buildings built since 1980 in the Tokyo metropolitan area.
Other rules for lowering inheritance tax basis
There are also other similarly beneficial yet not well-known rules for lowering your inheritance tax basis on your condo in Japan. For instance, there is a special rule if your property is abutting a major road, and the building site is located in two different zoning districts. In this case, you may be able to apply for approximately a 1% or 6% reduction in your rosenka tax basis, depending on the specific zoning districts and their FARs. Many taxpayers however do not know about this possible reduction, and so they pay more tax to the NTA than is necessary. And the NTA doesn’t tell you if you pay too much!
By far the most popular reduction of rosenka for residences is derived, however, from the Special Provision for Small-Scale Land etc. (小規模宅地等の特例). For residences on land up to 330 sq. meters, in the event the owner passes away, relatives cohabiting the residence who inherit ownership can get up to an 80% reduction in their inheritance tax basis. This special provision applies to the first 330 sq. meters (or 100 tsubo) of land, so that even if your residence is located on a site bigger than that, you can enjoy the benefit up to 330 sq. meters, with the remaining land receiving no tax basis adjustment.
Using this special exception can be a lifesaver for people inheriting a property that may have increased in value greatly over a long holding period. Since for most properties in Japan, the value of the land is a huge majority of the total assessed value of land and building, by utilizing this exception, heirs may be able to incur liability that is less than the standard deduction for inheritance tax purposes, meaning they pay no tax.
In 2016, there were 136,891 inheritance tax declarations filed with the NTA. According to information from the NTA, roughly 54% of these declarations claimed a reduction under the Special Provision for Small-Scale Land etc. Of these 54%, approximately 16% were able to utilize this special provision to be liable for no inheritance tax.
Source: Nikkei Shinbun, July 14, 2018