This is a translation of the Japanese original. The Japanese version is authoritative; figures follow Japanese tax law.
If you have roughly 10 rooms in an apartment building, or roughly 5 detached rental houses, letting out property is treated as "carried on as a business"[NTA No.1373]. Cross that line and the blue return special deduction (青色申告特別控除) goes from up to 100,000 yen to up to 650,000 yen, and salaries to family members, demolition losses and bad debts all become deductible. On the other side, in Tokyo you fall into the enterprise tax on individuals (個人事業税), at 5%. The extra 550,000 yen of deduction is worth about 165,000 yen a year in income tax and resident tax (for someone on a 20% rate; our own estimate). But the circular says "roughly", "circumstances equivalent to these" and "unless there is particular evidence to the contrary". It is not an absolute line.
The short answer: business scale changes five things
| Item | Not business scale | Business scale (roughly 10 rooms or 5 houses) |
|---|---|---|
| Blue return special deduction | Up to 100,000 yen | Up to 650,000 yen (2026 tax year; electronic book-keeping or e-Tax) |
| Salary to family members | Neither the full-time family employee salary nor the fixed deduction is available | Available (a reasonable amount within the figure on the notification) |
| Loss on demolition or retirement | Capped at the real estate income before the loss | The full amount is a necessary expense |
| Bad debt on rent | Recalculated retroactively to the year the rent was booked as income | A necessary expense in the year it became uncollectible |
| Enterprise tax on individuals | Not charged below the recognition threshold | 5% as a property letting business (after the 2.9 million yen business owner deduction) |
Sources: NTA No.1373 (law as at 1 April 2026) / Tokyo Metropolitan Bureau of Taxation, "Enterprise tax on individuals"
The first row is the big one. The three in the middle only matter when you make a loss, so most years they do nothing. Only the last row is a minus.
The text of the circular: 10 rooms and 5 houses are not an absolute line
The test comes from Basic Circular on Income Tax 26-9 (所得税基本通達26-9)[NTA, Basic Circular 26-9].
Whether the letting of buildings is carried on as a business producing real estate income is to be judged by whether it is carried on on a scale that amounts to a business in the ordinary sense; provided that where either of the following applies, or where circumstances equivalent to these are found from the state of the rental income, the state of management of the let assets and the like, it shall be treated as carried on as a business unless there is particular evidence to the contrary.
(1) For rented rooms, apartments and the like, the number of independent rooms available to let is roughly 10 or more. (2) For the letting of detached houses, roughly 5 or more.
The real test is the substantive one, "is this a scale that counts as a business in the ordinary sense?", and 10 rooms or 5 houses are signposts. Falling short still leaves room to be recognised through "equivalent circumstances", and meeting them still carries the condition "unless there is particular evidence to the contrary". If you are aiming at the 650,000 yen deduction with 9 rooms, get the material you would explain yourself with ready first.
The blue return special deduction: paper filing drops to 100,000 yen from the 2027 tax year
No.1373 states that at business scale the deduction is up to 550,000 yen through the 2026 tax year, 650,000 yen with electronic book-keeping or e-Tax, and that "in any other case the deduction is up to 100,000 yen"[NTA No.1373]. The 2026 tax reform raises the ceiling to 750,000 yen from the 2027 tax year (令和9年分) and at the same time cuts paper filing to 100,000 yen.
| Tax year | Paper | e-Tax or electronic book-keeping | Qualifying advanced electronic books |
|---|---|---|---|
| Through the 2026 tax year (令和8年分) | 550,000 yen | 650,000 yen | — |
| From the 2027 tax year (令和9年分) | 100,000 yen | 650,000 yen | 750,000 yen |
Sources: NTA, "Revision of the blue return special deduction"[NTA] / NTA, "Why not take digitalisation further with the electronic book-keeping rules (June 2026)"[NTA]. Both apply at business scale.
The 750,000 yen needs a notification, but "where you are already receiving the 650,000 yen deduction with qualifying advanced electronic books, you can receive the 750,000 yen deduction without filing again"[NTA]. We set out the detail in the 750,000 yen blue return special deduction.
For a landlord who files on paper, 550,000 yen becomes 100,000 yen from the 2027 tax year. Even with 10 rooms, the filing method alone costs 450,000 yen of deduction. Switch this year.
Salaries to family members, and what happens when you make a loss
Salary to a full-time family employee under the blue return
At business scale you can expense salaries paid to a spouse or relative who shares your household. The requirements are that the person is 15 or over, works exclusively in the business, and is paid a reasonable amount within the figure on the notification filed in advance[NTA No.2070]. A full-time family employee cannot also count as a spouse in the same household or a dependent relative, so weigh it against the spousal deduction.
Bad debt on rent
At business scale it is simply a necessary expense in the year it becomes uncollectible. Otherwise you recalculate back to the year the rent was booked as income, and that relief has a trap.
The case concerns 500,000 yen of unpaid rent that became uncollectible, at a scale that does not amount to a business. The NTA answers that where the real estate income is in the red, no amount is treated as never having existed, so a request for correction cannot be made[NTA Q&A case].
If the year you lost the rent was a loss-making one, you do not get the tax on that rent back. At business scale it is deductible. A demolition loss is also deductible in full at business scale, and otherwise capped at that year's real estate income[NTA No.1373]. If you are thinking about rebuilding, settle the test first.
Counting in practice: what counts as one room
All the circular gives is "the number of independent rooms available to let" and the number of detached houses. There is no conversion table.
What the published material does say
- What you count is the number of rooms you can let. If you own units in a condominium one by one, counting each as one room is the natural reading
- The income classification of car parks comes from a different circular. If you take charge of other people's property at your own risk it is business income or miscellaneous income; otherwise it is real estate income[NTA, Basic Circular 27-2]
- Even short of 10 rooms or 5 houses, there is room to be recognised through "equivalent circumstances"
What we could find no NTA basis for
- The conversion "5 parking spaces = 1 room". It is passed around as a rule of thumb, but circular 26-9 says nothing about car parks and we could find no basis for it in NTA material
- How jointly owned property is counted for income tax (by share, or the whole property). We could not confirm anything in writing
- Anything in writing on how vacant rooms are treated for income tax
On points with no published basis, ask the tax office or a tax accountant in advance. A structure that adds car parks to reach 10 rooms turns the 650,000 yen deduction into 100,000 yen if it falls apart. We have set out the book-keeping and filing steps in filing a tax return on rental income.
The other face: the enterprise tax uses a different test
A property letting business is a Class 1 business for the enterprise tax on individuals, at 5%. It is a different tax with a different test from the income tax 10 rooms and 5 houses. Tokyo publishes its recognition thresholds[Tokyo Metropolitan Bureau of Taxation].
| Type and use | Scale at which it is recognised (vacancies included) |
|---|---|
| Housing, detached | 10 or more houses |
| Housing, other than detached (apartments and the like) | 10 or more rooms |
| Non-housing, detached buildings | 5 or more buildings |
| Non-housing, other than detached buildings | 10 or more rooms |
| Land | 10 or more contracts (for residential use, a total let area of 2,000 m² or more also qualifies) |
| Overall judgment where the above are not met | A total floor area of 600 m² or more in let buildings and rental income of 10 million yen or more a year, among others |
| Car park (property taken into custody; a building or mechanical car park) | 1 or more parking spaces |
| Car park (other than the above) | 10 or more parking spaces |
Source: Tokyo Metropolitan Bureau of Taxation, "Enterprise tax on individuals", 8. Recognition thresholds for property letting and car park businesses. Each prefecture sets its own.
Three things are easy to miss. A mechanical or custody-type car park is a business from one space. A building with two or more independently partitioned rooms is recognised on the number of rooms, even when let as a whole. And jointly owned property is recognised as a whole regardless of shares, with the tax apportioned by share, so a couple owning half each of a 10-room apartment building are both liable[Tokyo Metropolitan Bureau of Taxation].
The tax is worked out by adding the blue return special deduction back to income, subtracting the business owner deduction of 2.9 million yen, and applying 5%. Payment is due in August and November as a rule. We explain the whole mechanism in the enterprise tax on individuals.
An estimate: how much does take-home change at 10 rooms
| Not business scale | Business scale (10 rooms, e-Tax) | |
|---|---|---|
| Blue return special deduction | 100,000 yen | 650,000 yen |
| Fall in income tax and resident tax | — | 165,000 yen (550,000 yen × 30%) |
| Enterprise tax on individuals | 0 yen | 105,000 yen ((5,000,000 yen − 2,900,000 yen) × 5%) |
| Net | — | about 60,000 yen less tax |
Note: this is our own estimate, not a calculation example published by the NTA or Tokyo. It excludes the special income tax for reconstruction, the effect of deducting the enterprise tax as an expense the following year, and the impact on National Health Insurance premiums.
The 650,000 yen deduction is worth a lot, but the enterprise tax takes about 60% of it back. That is the real picture. If your income fits inside the 2.9 million yen business owner deduction the enterprise tax is zero, and up to that point it is clearly in your favour. The higher the income climbs, the more incorporation comes into view. We have gathered the material for that decision in the taxes on property investment.
What you can do now
- Count again how many rooms and houses you have. What you count is the number of rooms you can let. Write them out by use.
- Count separately for the enterprise tax. Car parks and let land change the answer. Mechanical and custody-type car parks count from one space.
- Switch your filing to electronic. From the 2027 tax year the ceiling on paper is 100,000 yen. That alone moves 450,000 yen of deduction a year.
- If you are on the line, check in advance. A structure built on 8 or 9 rooms, or on adding car parks, rests on things that have not been published. Ask the tax office or a tax accountant.
Frequently asked questions
Do 9 condominium units plus 5 parking spaces make 10 rooms?
We could find no NTA material accepting that conversion. Circular 26-9 says nothing about car parks; it is only passed around as a rule of thumb in practice. If you are counting on the 650,000 yen deduction, ask the tax office or a tax accountant in advance. For the Tokyo enterprise tax on individuals, a car park is recognised from 1 space if it is custody-type or mechanical, and from 10 spaces otherwise.
Can 9 rooms still be recognised as business scale?
It can happen. The circular says the test is whether the scale amounts to a business in the ordinary sense, and 10 rooms or 5 houses are signposts. If circumstances equivalent to these are found from the rental income and the state of management, it is treated as a business. Conversely, even with 10 rooms the condition "unless there is particular evidence to the contrary" applies.
A couple own half each of a 10-room apartment building. Are both at business scale?
For the Tokyo enterprise tax on individuals it is stated expressly that jointly owned property is recognised as a whole regardless of shares, with the tax apportioned by share. For the income tax test, on the other hand, we could not confirm anything in writing from the NTA on how joint ownership is treated. Check the income tax treatment with the tax office or a tax accountant.
Without business scale, is there relief when rent goes uncollected?
You can recalculate retroactively, but there is a limit. The NTA Q&A case answers that where the real estate income is in the red, no amount is treated as never having existed, so a request for correction cannot be made. At business scale, the same situation is a necessary expense in the year it became uncollectible.
Reference links (sources)
- NTA No.1373, Letting of property as a business and other letting of property — the 10 rooms and 5 houses test and the five things that change
- NTA, Basic Circular on Income Tax 26-9 and 27-2 — the text of the test and the classification of car parks
- NTA Q&A case, Unpaid rent becoming uncollectible where the letting does not amount to a business — no relief in a loss-making year
- NTA No.2070, The blue return system — the requirements for the full-time family employee salary
- NTA, Revision of the blue return special deduction — paper filing is 100,000 yen from the 2027 tax year
- NTA, Why not take digitalisation further with the electronic book-keeping rules (June 2026) — the 750,000 yen deduction and the notification
- Tokyo Metropolitan Bureau of Taxation, Enterprise tax on individuals — the recognition thresholds, the 5% rate and the 2.9 million yen business owner deduction
Note: the estimate is our own application of the criteria above. For an individual decision, check with the tax office or a tax accountant.
