By: Jeff Wynkoop
The Liberal Democratic Party of Japan, the current majority party in the Japanese Diet, recently completed its 2017 Guidelines for Amending the Tax System (平成29年度税制改正大綱). Below is a short description of several of the key effects the Guidelines will have on the Japanese housing market. The Guidelines will be submitted to the regular session of the Diet for consideration by March 2017 and are usually passed without amendment.
Revision of How Fixed Asset Tax is Calculated for Condominiums
Fixed Asset Tax for single-family homes is calculated by applying the applicable tax rate to the tax basis of the building and the land where the building is located.
For condominiums, Fixed Asset Tax is determined by calculating the tax for the entire building and land (like a single-family home), and then apportioning tax liability to each owner based on the percentage of the total space of their condo (their exclusive use area or専有面積) to total area of the building. This means that currently whether you own a condo on the second floor or on the 42nd floor, your liability for Fixed Asset Tax is the same, provided the size of the condos is the same.
The problem, however, is that the market value for a condo on the 42nd floor is much higher than for a condo on the second floor.
Accordingly, the Guidelines seek to change the tax code by making the Fixed Asset Tax vary depending on which floor the condo is located. For lower floors, owners will benefit from a small tax discount, owners of middle-floor condos will largely see their tax liability stay the same, and owners of condos on higher floors will see a tax increase.
For a 40-story building, owners of upper-floor condos will pay a little more than 10% more Fixed Asset Tax when compared to owners of lower-floor condos, while the total Fixed Asset Tax for the entire building is slated to remain the same.
The above tax revision will apply to all condo buildings over 60 meters in height (basically 20 or more stories) that will have construction completed on or after January 2nd, 2017. However, individual condos subject to a purchase agreement before March 31, 2017 will be grandfathered in.
There will also be a similar tax revision for City Planning Tax and Real Estate Acquisition Tax. Although not included in the Guidelines for 2017, the National Tax Agency will also likely require a similar revision for Inheritance Tax in the near future.
Tax Incentive for Residences Remodeled for Long-Term Durability
In addition to the current tax incentives for remodeling for earthquake readiness and energy efficiency, there will be a new tax incentive for houses remodeled for long-term durability.
In the event an existing home is remodeled and certified as a long-term durable house (長期優良住宅), the owner will be allowed to deduct up to ¥625,000 from their income tax, and for one year after construction, Fixed Asset Tax for the remodeled portion will be reduced by 66%.
There is also a provision in the Guidelines formalizing the tax breaks (no gift tax, special tax deduction for mortgage payments, special reduction of Registration Tax or 登録免許税) for owners of houses that become uninhabitable due to national disaster such as last year’s Kumamoto earthquake.
You may also be interested in: Guide to Japanese Real Estate Taxes