There are various taxes on real estate investment. If you know the types of taxes and how to calculate them, you will be able to know exactly how much money you will actually have after purchasing. In this article, we will explain in detail the taxes that occur at the time of purchase, holding and sale.
Taxes levied on the purchase and sale of real estate investments
Taxes paid on the purchase of real estate are the real estate acquisition tax, registration and license tax and stamp duty.
If you acquire real estate by a method other than inheritance such as buying, selling, or donating, you will be charged real estate acquisition tax. The real estate acquisition tax is 4 per cent of the value of land and buildings in principle. However, until the end of March 2021, a lower tax rate of 3 per cent was applied to land and residential buildings. If the land is residential land, the value could be halved.
When you register real estate, you will be required to pay registration and license tax. If you ask a judicial scrivener for registration, the registration and license tax is usually included in the judicial scrivener’s fee. The registration and license tax is 2 per cent of the value of land and buildings in principle.
When you prepare a document such as a real estate sales contract or a document related to a loan, you must pay stamp duty. The amount of revenue stamps is determined by the type of document and the amount written. For example, you need to put a revenue stamp of 30,000 yen on a sales contract of 100 million yen real estate.
Taxes levied on the sale of real estate include capital gains tax and resident tax.
Capital gains are calculated by subtracting the purchase price and processing costs from the sale price. Therefore, capital gains tax will be imposed only if you sell for more than the purchase price. In the case of capital gains, you file a tax return then they are naturally added to the resident tax. Capital gains tax and resident tax are calculated separately from other income such as salary and pension.
The income tax rate increases as the income increases, but the transfer tax rate is not affected by income. Instead, the tax rate changes depending on the transfer period. If you transfer within five years, the income tax rate is 15 per cent and the resident tax rate is 5 per cent. If your transfer takes over five years, the income tax rate is 30 per cent and the resident tax rate is 9 per cent.
Taxes levied on property holdings
Next, I will explain the taxes that occur when you own real estate. Taxes levied on property holdings include fixed property tax and city planning tax, income tax and resident tax. As long as you own real estate, you have to pay property tax and city planning tax every year. The standard rate of fixed asset tax is 1.4 per cent, and the standard rate of city planning tax is 0.3 per cent.
The standard tax rate is prescribed by the local tax law, but it can be changed by local governments if necessary. Payment forms for property tax and city planning tax are sent by the local government to the property address between May and June every year. You don’t have to pay income tax or resident tax just by owning real estate, however, it is necessary to declare rent income as real estate income.
Real estate income is calculated by deducting expenses for maintenance and management of real estate from rent income. Real estate income is combined with other income such as salary and pension. Income tax must be calculated by multiplying the income tax rate by the total amount of income. The income tax rate is set at between 5 and 45 per cent depending on the amount of income. The higher the income, the higher the income tax rate.
If you file a final tax return to declare your real estate income, the amount of your real estate income will be added to your residential tax. If you want to know the estimated amount of resident tax, you can calculate it by multiplying your real estate income by 10 per cent.
Taxes that can be expensed and taxes that cannot be expensed
There are various types of taxes that arise from real estate investments, but there are taxes that can be applied to expenses and taxes that cannot. Taxes that can be applied to expenses are real estate acquisition tax, registration and license tax, stamp duty, fixed property tax and city planning tax. Income tax and resident tax cannot be treated as expenses. Be careful not to charge to expenses by mistake.
The amount received from real estate investment depends on taxes. Before making a real estate investment decision, estimate the taxes that will be levied and predict how much money you will have left. When a real estate agent prepares a business plan or a cash flow statement, it is important to check if there are any omissions in tax items.