Fixed asset taxes on property owned by households in Japan will very likely rise in 2021 due to the knock on effects of the Tokyo Olympic building boom. This is due to the method used by the Ministry of Internal Affairs and Communications to estimate property values, which then forms the basis for calculating the two main annual taxes levied on home owners in Japan: Fixed Asset (Property) Tax (koteishisanzei) and City Planning Tax (toshi keikakuzei).
According to an analysis by the Nikkei newspaper, the rise in building material costs caused by large-scale infrastructure construction related to the now postponed Tokyo 2020 Olympics will hit some homeowners directly in the pocketbook starting next year.
For example, the Nikkei estimates that the combined fixed asset and city planning taxes charged to the owner of a 57-sqm newly constructed apartment in a five-story building in the Tokyo 23 Wards will likely rise from about ¥62,000 ($576) this year to about ¥67,000 in 2021, an estimated increase of about 8.1%.
Even as the government has implemented numerous “life support measures” and benefits to individuals to offset the effect of the novel coronavirus, there may be cases where people will face increased financial burdens without any direct offset from the government.
Fixed asset tax (property) tax and city planning tax are local taxes imposed at the municipal level on buildings and land.
The fixed asset tax rate is 1.4% of the value of the property as indicated in the ‘fixed asset tax book’ (koteishisan kazeidaichou) for such asset, and the city planning tax rate is 0.3% of such value.
Both of these taxes are payable to the local city authorities quarterly in April, July, December and the following February. City planning tax only applies to properties located in designated city planning areas (toshi keikaku kuiki) under Japanese zoning laws. If your property is not located in a designated city planning area, it will not be assessed for city planning tax. Also, the actual tax rate may differ slightly depending on the municipality; some municipalities do not charge city planning tax at all.
How higher building material costs affect property tax
The Ministry of Internal Affairs reviews the standards for evaluating the asset value of buildings every three years. Property and city planning tax amounts charged for buildings owned by individuals and corporations owned as of January 1, 2021 will be based on asset values based on actual prices for building materials and labor costs as of July 2019.
Looking back to July last year, many developers in the greater Tokyo area were in the midst of contracts for Tokyo 2020 Olympic projects, hotel developments, or residential apartment complexes meant to leverage the expected “Olympic effect”.
One of the unintended consequences of the Olympic effect was the soaring costs for building materials and labor. For example, the valuation per square meter of stone used for the floors of houses will increase by more than 8% compared to the current valuation. The valuation per tonne (1,000-kg) of steel used in buildings is estimated to increase by 20% for the 2021 tax assessment.
The Nikkei did a rough analysis of how the tax burden for property and city planning tax would increase for certain cases, using the new (July 2019) valuation standard. One case (for a 57-sqm newly constructed apartment in the Tokyo 23 Wards) was already mentioned above. Below are some other examples:
- 40-sqm apartment in a 7-story newly constructed apartment building in the Tokyo 23 Wards: Current estimated combined property and city planning tax is about ¥48,000. This is estimated to increase to ¥51,000 next year (+6.3%).
- Newly constructed standard two-story house (total floor area of 82.48-sqm): Current estimated combined property and city planning tax is about ¥72,000. This is estimated to increase to ¥77,000 next year (+6.9%)
- Newly constructed standard two-story house (total floor area 106-sqm): Current estimated combined property and city planning tax is about ¥88,000. This is estimated to increase to ¥90,000 next year (+2.3%).
The “taxation standard amount” is calculated for an entire building, but that amount changes depending on what building material(s) are used, to what extent they’re used and the total floor area of the property. Wood construction, for example, is less expensive than steel-reinforced concrete. High-rise buildings, however, tend to require steel frame, which will tend to increase the tax burden for the individual unit owner. The “taxation standard amount” will also tend to be lower for older buildings, but because the higher materials and labor cost amounts (as of July 2019) will be applied to all properties for tax assessment purposes, the Nikkei estimates that there will be cases where the “taxation standard amount” will increase, even for existing residential properties.
Property tax and city planning tax are also assessed on the land occupied by a property. The Ministry of Internal Affairs is currently reviewing the evaluation criteria for land. If land prices do not fall significantly, as assessed by local municipalities in 2021, the building portion of the “taxation standard amount” will take the the brunt of the expected tax increase.
Tax break for SMEs and sole proprietors, but not individual homeowners
As detailed in this article (Coronavirus tax relief measures for individuals, homeowners, and small and medium enterprises in Japan), SMEs which are experiencing financial hardship due to the coronavirus and which have depreciable assets (such as machinery) or real estate (such as offices, factories, and stores) will be exempt (between 50% and 100%) from property tax and city planning tax for the 2021 fiscal year.
This exemption is not available to homes owned by individuals, so salaried workers (who didn’t buy their home through a sole proprietorship) will not be getting a helping hand from the government for property taxes.
Source: Nikkei newspaper, May 23, 2020 (in Japanese)
Lead image: Big construction crane working in big construction site in Tokyo, iStock