This is a translation of the Japanese original. The Japanese version is authoritative; figures follow Japanese tax law.
When you inherit the land under the house a parent lived in, you can cut its assessed value by up to 80%. This is the special valuation reduction for small-scale residential land (小規模宅地等の特例). Land assessed at 50 million yen can be counted as 10 million yen, and plenty of families end up owing no inheritance tax at all. But whether you can use it depends on who inherits. A spouse qualifies with no conditions. A child who lived with the deceased must keep living there until the filing deadline. A child who lived elsewhere must meet all six requirements of the rule known as 家なき子, the "child with no home of their own". This article sorts out the three categories of land and their reduction rates, the test applied to each heir, how a parent's move into a home for the elderly and a two-household house are treated, and the filing requirement, using National Tax Agency (NTA) materials.
The short answer: three categories, their reduction rates, and who has to inherit
| How the land was used | Category | Area cap | Reduction |
|---|---|---|---|
| The deceased (or a relative sharing the same household finances) lived there | Specified residential land (特定居住用宅地等) | 330㎡ | 80% |
| The deceased used it for a business other than renting | Specified business land (特定事業用宅地等) | 400㎡ | 80% |
| It was leased to a family company that used it for its business | Land used by a specified family company (特定同族会社事業用宅地等) | 400㎡ | 80% |
| It was used for a rental business, such as an apartment building or a car park | Land used for a rental business (貸付事業用宅地等) | 200㎡ | 50% |
Source: National Tax Agency, Tax Answer No.4124 "Special treatment of the value of land used for an inherited business or as a residence (the small-scale residential land reduction)"[NTA]
The most common case by far is the land under the family home. For that land, who has to inherit it for the reduction to apply is set out below.
| Who inherited | Condition | Result |
|---|---|---|
| The spouse | None (whether they lived together or not) | Available |
| A relative who lived with the deceased | Lived there from immediately before the death until the filing deadline (10 months), and keeps holding the land | Available |
| A relative who lived elsewhere (家なき子) | Meets all six requirements below | Depends on the requirements |
| Land lived in by a relative sharing the same household finances, inherited by that relative | Keeps living there until the filing deadline, and keeps holding the land | Available |
The six 家なき子 requirements for a child who lived elsewhere
Where a child who lived apart from the parent inherits the land under the home, all six of the following must be met[NTA No.4124].
- Not being a restricted resident or restricted non-resident taxpayer without Japanese nationality (a Japanese national living in Japan is never caught by this)
- The deceased had no spouse
- No heir lived with the deceased
- In the three years before the death, the heir never lived in a house owned by themselves, their spouse, a relative within the third degree of kinship, or a company closely connected to them
- The heir has never at any time owned the house they live in at the time of the death
- The heir keeps holding the land until the filing deadline
Cases that qualify
- The father has already died and the mother lived alone. The child has rented from an unrelated landlord for three years or more
- The child lived for five years in company housing owned by an employer unconnected to them
Cases that do not
- The child lives in a house they own (or lived in one within the past three years)
- The child lives in a house registered in the name of their spouse or a sibling (a relative within the third degree)
- The child sold their own house to a child or relative and rented it back, becoming a tenant on paper only (ruled out by requirement 5)
- The deceased parent had a spouse, or a sibling lived with the parent
The 2018 reform closed off the route of selling your house to a relative and renting it back, as well as gifting your house to your child and then renting it. Requirements 4 and 5 are what did that.
If the parent had moved into a home for the elderly: three conditions
Even where the parent was living in a home for the elderly immediately before death, the land under the family house still counts as residential land for the reduction if the following three conditions are met[NTA No.4124].
- The parent had been certified as needing long-term care or support (要介護認定・要支援認定; a disability support classification also counts)
- The facility was a qualifying one, such as a special nursing home for the elderly, a fee-charging home for the elderly, a long-term care health facility, or serviced housing for the elderly
- The house left empty was not rented out to anyone and not used for a business
The third condition is the easy one to miss. Rent the empty family home to someone and it stops being residential land and becomes rental land, which drops the reduction from 80% to 50%. A parent who was never certified is outside the rules altogether.
A two-household house: how it is registered changes the result
For a two-household house where the parents and the child's family live in the same building, the treatment splits according to whether there is a separate unit registration (区分所有登記)[NTA No.4124].
| How the building is registered | Land covered by the reduction | Is the child a "relative living together"? |
|---|---|---|
| No separate unit registration (the parent alone, or co-ownership) | The land under both the parent's part and the child's part | Treated as living together |
| Separate unit registration (the ground floor and the first floor registered separately) | Only the land under the parent's part | Not living together unless the child lived in the parent's unit |
Even a fully separated design, with its own front doors and no internal passage, causes no problem as long as no separate unit registration was made. Anyone about to build a two-household house should check this before deciding how to register it.
A worked example, and the cap when you hold several plots
- Within 330㎡, so the whole plot qualifies: 50 million yen × 80% = 40 million yen taken off
- Value of the land used in the inheritance tax calculation: 10 million yen
- With two children as heirs the basic exclusion is 42 million yen. Land of 10 million yen plus deposits of 30 million yen comes to 40 million yen, so no inheritance tax is due (without the reduction it would be 80 million yen and taxable)
Where you hold both the land under the family home and the land under a rented apartment building, the area cap is apportioned. The NTA's formula is as follows[NTA No.4124].
Business area × 200/400 + residential area × 200/330 + rental area ≦ 200㎡
With no rental land there is no apportionment, and you can use both the residential 330㎡ and the business 400㎡, up to 730㎡ in total.
The basic approach is to give priority to the family home at 80% and put what is left of the allowance towards rental land at 50%. That said, giving priority to land with a higher value per square metre produces a bigger reduction in money terms, so where several plots are involved it is worth having a tax accountant run the numbers.
No filing, no reduction: file a return even when the tax comes to zero
To claim this reduction you must state on the inheritance tax return that you are claiming it, and attach the calculation schedule and a copy of the estate division agreement among other documents[NTA No.4124]. So even in a family whose tax comes to zero once the reduction is applied, the reduction is not granted unless a return is filed, and inheritance tax then arises on the value without it.
The other condition is that the estate has been divided by the filing deadline, ten months from the day after the death. If the division has not been settled, file with a "Statement of expected division within three years after the filing deadline" attached; divide the estate within those three years and you can claim the reduction through a request for correction[NTA No.4208].
Note that the reduction cannot be used for land given during the parent's lifetime under the settlement-at-inheritance taxation system (相続時精算課税). As a rule, land under the family home should wait until the inheritance. On choosing between the two gift regimes, see choosing between annual gift taxation and settlement-at-inheritance taxation. For the inheritance tax calculation as a whole, see inheritance tax rates and the three-step calculation.
Frequently asked questions
My mother is inheriting the family home. Can she use the reduction?
Yes. A spouse faces no requirements as the person inheriting. Note, though, that a spouse also has a separate tax credit that exempts up to 160 million yen, so it can work out better across both the first and the second inheritance for a child to inherit the house and use the reduction while the mother inherits the deposits.
I want to sell soon after inheriting. Can I still use the reduction?
A relative who lived with the deceased and a 家なき子 heir must keep holding the land until the filing deadline, ten months on. Sell before then and the reduction is lost. A spouse is not subject to this requirement.
My plot is 400㎡. What happens to the part above 330㎡?
The first 330㎡ is reduced by 80% and the remaining 70㎡ is valued as normal. The calculation apportions by area.
I have missed the filing deadline. Is the reduction gone?
You can still claim it on a late return, provided you meet the requirements. The additional tax for failure to file and delinquent tax do apply, so the sooner you file, the smaller the cost.
Reference links (sources)
- NTA No.4124, the small-scale residential land reduction (reduction rates, area caps, requirements for each heir, homes for the elderly, separate unit registration, the filing requirement)
- NTA No.4208, filing when the estate has not been divided
- NTA No.4152, calculating inheritance tax (the taxable estate is computed on values after the reduction)
Note: the worked example is our own estimate, applying the NTA's reduction rates. Valuing land and testing the requirements turn heavily on individual circumstances, so please check with a tax accountant or your tax office before filing.
