Rental Income Tax Return: Expenses and Depreciation

This is a translation of the Japanese original. The Japanese version is authoritative; figures follow Japanese tax law.

Letting out your own home after a job transfer, letting a family house you inherited — once you take in rent this way, it becomes "real estate income" and you have to file a tax return. The income is the rent, key money, renewal fees and other receipts, less property tax, fire insurance premiums, management fees, repair costs, loan interest and depreciation, and the largest expense of all is depreciation. In the example of letting out your own home (a wooden building worth 15 million yen) for 100,000 yen a month after a transfer, the income is about 140,000 yen once the 690,000 yen of depreciation is counted. Using National Tax Agency materials, this article puts on a single page the checklist of receipts and expenses, how to work out the useful life (22 years for a wooden building, and the rule for second-hand property), the aggregation of losses against salary when you run a deficit, the fact that the housing loan deduction stops while the property is let, and the treatment of small-scale letting below business scale (5 buildings / 10 units).

The short answer: a checklist of receipts and expenses

What counts as a receipt

Rent (arrears count as income for that year too; a bad debt is recognised in the year the loss becomes final)
Key money, renewal fees, fees for a change of name on the lease
The part of a deposit or security money that is fixed as non-refundable (the refundable part is not income)
Common-area charges, parking fees, and money received for electricity and water
Income from selling solar power from the roof (where the property is let)

What counts as an expense

Property tax and city planning tax (on the part that is let)
Fire insurance and earthquake insurance premiums (for that year)
Management fees paid to a management company and advertising fees for finding tenants (the agency commission)
Repair costs (restoration to the original state, repairs to equipment. Extensions and work that raises the value are capital expenditure and are depreciated)
Loan interest (not the principal. The interest on the land portion is excluded from the aggregation of losses when you are in deficit)
Depreciation (building and equipment. Land is not depreciated)
Travel to the property, tax accountant fees, bookkeeping software

Sources: National Tax Agency, Taxanswer No.1370 "When you receive income from real estate (real estate income)"[NTA], No.1373 "The distinction between letting real estate as a business and other letting of real estate"[NTA]

What does not count as an expense: repayment of the loan principal, costs for the period you lived there yourself, income tax and resident tax, and household expenses. If you let only part of your own home (a single room), property tax and insurance premiums are apportioned by the share of the floor area that is let.

An example: letting out your own home for 100,000 yen a month after a transfer (wooden, 10 years old, building worth 15 million yen)

Item	Annual amount	Note
Rental income	1.2 million yen	100,000 yen x 12 months
Key money	100,000 yen	One month's rent on move-in
Total receipts	1.3 million yen
Property tax and city planning tax	-120,000 yen	Land and building
Fire insurance premium	-15,000 yen
Management fee (5% of the rent)	-60,000 yen
Advertising fee for finding a tenant	-100,000 yen	One month's rent
Repairs (fixing the water heater and so on)	-50,000 yen
Interest on the housing loan	-120,000 yen	Repayment of principal is not allowed
Depreciation	-690,000 yen	Building 15 million yen x 0.046 (wooden, 22 years, straight-line method)
Real estate income	about 145,000 yen	Added to salary and taxed on an aggregate basis

The cash left in hand is "1.3 million yen of rent - 465,000 yen of actual spending - the loan principal", but in the tax calculation the 690,000 yen of depreciation counts as an expense, so the income falls to 145,000 yen. Depreciation is an expense that involves no cash outlay, and it is the main reason the tax burden on rental income is light. For an employee earning 6 million yen a year, the income tax and resident tax on this income come to about 30,000 yen.

Calculating depreciation: take the building alone, and divide it over the useful life

Separate the building from the land. Land cannot be depreciated. If the purchase contract states a price for the building, use that; if not, apportion by the ratio of the assessed values for property tax, or something similar. You can also work back from the consumption tax amount (consumption tax applies to buildings but not to land).
Decide the useful life. For a new building, the statutory useful life (22 years for wooden, 27 years for light-gauge steel frame (over 3 mm and up to 4 mm), 34 years for heavy-gauge steel frame, 47 years for reinforced concrete). For a property bought second-hand, the simplified method gives "(statutory useful life - years elapsed) + years elapsed x 20%" (fractions of a year discarded). A 10-year-old wooden house gives (22-10) + 10 x 0.2 = 14 years; a 25-year-old wooden house, which is past its statutory life, gives 22 x 0.2 = 4 years.
Calculate by the straight-line method. Buildings use the straight-line method only. Depreciation = acquisition cost x depreciation rate (0.046 for 22 years, 0.072 for 14 years, 0.250 for 4 years). In the year letting starts part-way through, the amount is pro-rated by month.
A point to watch when you start letting out your own home. The building aged during the years you lived there as well, so the "undepreciated balance" at the point letting starts is the acquisition cost less the decline over the period of residence (calculated by the old straight-line method over a period 1.5 times the statutory useful life). In the example above, ten years of residence works out at a decline of about 4.2 million yen, and the amount left to depreciate is smaller by that much. For the details of the years and the rates, see the basics of depreciation.

When you let a family house you inherited, you take over the acquisition cost and the acquisition date of the parent who died. If your parent built a wooden house 30 years ago, its statutory useful life has already passed, and it is treated as having finished depreciating apart from an undepreciated balance of around 5% of the acquisition cost, so the depreciation is very small. You cannot use the value at the time of inheritance as the acquisition cost.

A deficit can be set against your salary (except the part for interest on the land)

If real estate income turns into a deficit, you aggregate the loss with your employment income and get income tax and resident tax back. This happens in a year with a long vacancy, a year with a large repair, or in the early years when depreciation is big. However, the part of the loss that corresponds to "interest on the loan taken out to buy the land" is outside the scope of the aggregation of losses (where a single loan covers both land and building, it is applied to the building first, so the interest within the range of the building price can be aggregated).

Example: a year in which the property above was vacant for four months and 300,000 yen of exterior wall repair was done

Receipts 800,000 yen - expenses (property tax 120,000 + insurance 15,000 + management 40,000 + repair 300,000 + interest 120,000 + depreciation 690,000 = 1,285,000 yen) = -485,000 yen
Aggregated with employment income from an annual salary of 6 million yen, about 97,000 yen comes back in income tax and resident tax (at a 20% rate)

Even in a deficit year, you cannot get the aggregation of losses without filing a return. With a blue return you can also carry the loss forward for three years.

Below 5 buildings / 10 units is "not business scale" - the blue return deduction is 100,000 yen

The National Tax Agency treats roughly 10 or more independent units in the case of rented rooms or apartments, and roughly 5 or more in the case of detached houses, as "business scale (5 buildings / 10 units)"[NTA]. Letting one home of your own or one inherited house is not business scale, so the following treatment applies.

	Not business scale (1 to 4 units, etc.)	Business scale (5 buildings / 10 units or more)
Blue return special deduction	Up to 100,000 yen	Up to 650,000 yen (double-entry bookkeeping and e-Tax)
Salary to family members (salary to a family employee)	Not allowed	Allowed
Loss from demolishing a building, or from a disaster	Limited to that year's real estate income	Fully deductible (a deficit can be aggregated)
Bad debts on rent	Corrected retroactively to the year the income was recorded	An expense in the year collection became impossible
Enterprise tax on individuals	Not charged	5% (after the 2.9 million yen deduction)

Even for the 100,000 yen deduction it is worth filing the application for approval of blue return status (by 15 March of the year letting starts, or within two months of the start of letting). Simple bookkeeping is enough: you only record the rent coming in and the expenses going out. See blue returns and white returns. The tax on holding several units in earnest is set out in the tax on real estate investment.

Pitfalls when you let out your own home

The housing loan deduction cannot be used while the property is let. It stops from the year you no longer live there yourself. If the whole family moves out because of a transfer, you can have the deduction reapplied for the remaining period once you come back and live there again (file a notification with the tax office before moving out). If you are posted alone and your family keeps living there, the deduction continues.
Check that you are not breaching the loan contract. A housing loan is conditional on you living there yourself, and letting the property needs the bank's consent. Letting it without telling them can lead to a demand for repayment in full. For a job transfer, consent is normally given.
The 30 million yen deduction when you sell runs only until the end of the third year after you stop living there. If you sell after starting to let, the special treatment for a residential property is unavailable once that deadline has passed. See the 30 million yen special deduction on selling your own home.
Resident tax and National Health Insurance premiums go up. Real estate income is taxed on an aggregate basis, so it is reflected in the next year's resident tax and, for people in National Health Insurance, in the premiums. It does not affect an employee's health insurance premiums.
Turning it into a minpaku changes the income category. A minpaku that comes with accommodation services is miscellaneous income (or business income), which is separate from real estate income. See minpaku and tax.

Frequently asked questions

If the rental income is 200,000 yen a year or less, do I not have to file a return?

If you are an employee and your real estate income (receipts minus expenses) is 200,000 yen a year or less, no income tax return is required. A resident tax return is still required, and in a deficit you are better off filing, because the aggregation of losses brings tax back. The test is the income after expenses, not the amount of the rent.

Is the whole cost of a renovation an expense for that year?

Repairing broken equipment and restoring the property to its original state are repair costs and an expense for that year. Work that raises the value of the building, such as upgrading the kitchen, changing the layout or seismic reinforcement, is capital expenditure and is spread over several years or decades through depreciation. Work costing less than 200,000 yen, and work carried out on a cycle of three years or less, can be treated as repair costs.

Summary

Real estate income is rent, key money, and renewal fees minus fixed asset tax, management fees, repair costs, loan interest, and depreciation.
Only the building is depreciated — 22 years for wood construction, with used buildings using a simplified method to estimate useful life. For a home rented out at ¥100,000 a month during a job transfer, income works out to roughly ¥145,000.
A loss can be offset against salary income, except for the portion of loan interest used to buy the land.
Fewer than 5 buildings or 10 units is not a business-scale operation, and the blue-form special deduction tops out at ¥100,000.
The mortgage tax deduction cannot be used while the home is being rented out. Renting it requires the bank's consent.

Reference links (sources)

This article is based on the materials below. Because the depreciation calculation changes with the circumstances of each property, we suggest checking with the tax office's advice desk or a tax accountant in the first year.

Note: this article is general information. The example amounts are approximate and vary with the property and the area.