New 2021 mortgage loan tax deduction rules for homeowners in Japan

The Japanese government has revealed details of expanded tax deductions for mortgage loans for homeowners that will come into force in 2021.

The final decision on the rule changes will be made by the LDP’s tax system investigation committee and will be included in the tax revision outline that will be compiled around December 10th. Here are the key changes scheduled for 2021:

1. Move-in date for 13-year home mortgage deduction period to be extended to December 31, 2022

The home mortgage loan deduction currently lets homeowners with outstanding loan balances deduct 1% of the year-end mortgage balance from their income tax and resident’s tax.

This deduction currently can be taken over a 13-year period for outstanding balances of 40 million JPY or less, so the maximum deduction comes to 400,000 JPY.

If your home is certified as “long-term excellent housing” (長期優良住宅) or certified as “low-carbon housing” (低炭素住宅), this deduction applies to balances of 500 million JPY or less, or a maximum of 500,000JPY per year.

13-year period deduction

Currently, to qualify for the 13-year period deduction, you have to move into your home by December 31, 2020.

This is because the usual deduction is only allowed over a ten-year period. This was extended to 13-years when the consumption tax was raised to 10 percent on October 1, 2020, in order to mitigate the financial impact for homebuyers. Sales of newly constructed condominiums and free-standing houses are subject to consumption tax. Re-sale houses and apartments are not.

Rule change

The 2021 change will extend the move-in date to qualify for the 13-year deduction period to December 31, 2022. The sales contract must be signed by the following dates:

  • For a new custom-built free-standing house: By September 30, 2021
  • For a manshon (condominium) or resale free-standing house: By November 30, 2021

The reasoning behind the extension is that it is usually not possible to immediately move into a property after signing  the sales contract.

The government also wants to provide support for potential homebuyers who may be economically impacted by the pandemic. The extension will also help development companies and real estate agents deal with unintended consequences of social distancing measures and strict international border controls. For example, the delivery date of some newly constructed condominiums has had to be pushed back due to delays in getting the appropriate materials and fixtures, many of which are imported from China.

2. Allow mortgage deduction for floor area size of 40-sqm and above

The home mortgage loan deduction currently lets homeowners deduct 1% of the outstanding loan balance of their year-end mortgage balance for properties with floor areas of 50-sqm and above. This is because, currently,  the mortgage deduction is meant to be used by families purchasing a “family-sized” 3LDK (3-bedroom) home, which is usually at least 50-sqm in floor area size.

Rule change

The 2021 change will expand the deduction to include properties of at least 40-sqm.

The reasoning behind this is allow couples without children who may want to purchase a smaller apartment to also be able to take the 1% deduction.

However, for properties that are not at least 50-sqm in floor size, there is an income limit of ¥10 million for using the deduction. This is because the deduction is meant to be used for owner-occupied homes, not investment properties. Many retail investors buy investment properties in urban centers that are smaller-sized apartments. The caveat to the rule would have the effect of limiting some investors from using the deduction.

3. Allow the 1% mortgage deduction throughout fiscal 2021, but to be reviewed in fiscal 2022

The government wants to allow the current 1% mortgage deduction rule to continue next year but has indicated that it plans to review the policy for possible revision in fiscal 2022.

This is because the Audit Board has said that in Japan’s ultra-low interest rate environment, a borrower’s mortgage rate may actually be lower than the 1% deduction rate, allowing them to benefit from a negative spread, in which the amount allowed for deduction would exceed the actual interest expense. A possible revision to the rule would be to allow people to only deduct the amount of the actual interest payment if the amount of interest paid is less than 1% of the loan balance.

This would indeed be a drastic change to the current standard 1% deduction and is something that potential homebuyers should keep in mind as the government moves forward with tax reform.

Source: Nikkei newspapaer, December 5, 2020 (in Japanese)

Lead image: Traditional-style house in Japan, iStock