Personal vs. Company Ownership: Tax Implications for Purchasing Property in Japan (Part 2)

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We are often asked a question by our overseas clients who are planning to invest or relocate in Japan : From a tax perspective, is it more advantageous to purchase Japanese property under an individual name or a company name? This issue involves complex tax regulations and personal circumstances. We will explore this topic and provide a comprehensive analysis to assist our clients in making informed decisions. In Part 1, we have introduced the tax comparison between individuals and companies when it comes to purchasing, holding, and selling properties in Japan. In Part 2, we will discuss the differences between individuals and companies in terms of inheriting and gifting properties.

Comparison of taxation for individuals and companies inheriting real estate

“Inheritance tax” is a tax imposed on inherited assets. Since 2015, the basic tax exemption amount for inheritance tax has been modified, resulting in an increased number of individuals subject to inheritance tax. Therefore, inheritance tax has become more important for property owners to consider.

★Even if the deceased property owner is a foreigner, regardless of the nationality or residence of the heir, all assets will be subject to Japanese inheritance tax.★

※The tax rate is subject to change due to Japanese policies.

(The following content relates to reducing inheritance tax through real estate and applies only to foreigners residing in Japan.)

Reasons why real estate is effective in reducing inheritance tax

Inherited properties are subject to inheritance tax. When calculating inheritance tax, the total taxable estate is considered. In the case of cash and savings, the assessed value for inheritance tax is based on the amount. However, for real estate, the assessed value for inheritance tax is calculated using factors such as surrounding property prices. Therefore, if the assessed value is lower than the market price, it can reduce the total taxable estate and result in a reduction in inheritance tax.

Considerations when aiming to reduce inheritance tax

If there is a large amount of cash and deposits, converting them into real estate can reduce the amount of inheritance tax. However, there are different points to consider.

Considerations for individuals

One point to note when privately owning real estate is that the most effective timing to reduce the inheritance tax is the time of purchase. In the case of profitable rental properties, the asset value may increase due to rental income.

Considerations for companies

In the case of companies, there are regulations that calculate the inheritance tax based on the market price if the property is acquired within 3 years from the purchase date. Therefore, it does not apply to the reduced inheritance tax assessment value used at the time of inheritance.

Advantages of individuals applying for “Small-scale Housing Exemption”

As an inheritance strategy, the advantage of individuals purchasing real estate is the eligibility to apply for the “Small-scale Housing Exemption.” The “Small-scale Housing Exemption” applies when specific conditions are met, such as the residence or business land of the heir or direct relatives supported by the heir, and it allows for a reduction of up to 80% of the assessed value.

Benefits of Inheriting Real Estate through Company

When gifting real estate under an individual’s name, any amount exceeding 1.1 million yen received within a year will be subject to gift tax. The 1.1 million yen is the basic tax allowance amount.

★Even foreigners who own properties in Japan are subject to Japanese gift tax★

Fun fact: “Gift Tax” is a national tax, while “Real Estate Acquisition Tax” is a local tax collected by prefectures and municipalities. Unlike gift tax, real estate acquisition tax is invoiced by the local tax office (or city tax office for some designated cities) without the need for tax filing. Additionally, Please note that even if gift tax is not levied due to the spousal special exemption, real estate acquisition tax will still be imposed on the spouse.

Gift tax rates (applicable special rates) for parents or grandparents gifting to children or grandchildren aged 18 or older:

※The tax rate is subject to change due to Japanese policies.

Gift tax rates (general rates) for situations other than the aforementioned cases (e.g., gifts between siblings or spouses):

※The tax rate is subject to change due to Japanese policies.

If you want to gift your assets during your lifetime as an inheritance measure, using a company has advantages over an individual. When gifting assets as an individual, gift tax must be paid.

An alternative option is to make gradual gifts each year to benefit from the basic tax exemption. However, for real estate, each gift received requires registration procedures and payment of registration tax and real estate acquisition tax.

For a company: Inheriting through gifting shares allows for a bypass of registration procedures, and thus, no registration tax or real estate acquisition tax needs to be paid to proceed with the inheritance.

For an individual: In cases where parents or grandparents gift to children or grandchildren aged 18 or older (i.e., the special cases mentioned above), the giftor can choose to utilize the “settling tax system for inheritance” so that a maximum gift amount of 25 million yen is exempt from gift tax. When an inheritance occurs, the gifted amount will be added to the inherited property and subject to inheritance tax.