Investing in highly-depreciable real estate overseas will quickly lose its appeal for Japan-based investors as the Japanese government closes a tax loophole.
Generally speaking, investment properties that are rented out to tenants can be depreciated to reduce taxable income. Losses from real estate earnings can be used to write-off other sources of income.
For properties located in Japan where much of the value lies in the land rather than the building, the depreciation may be somewhat limited. For properties in the US, however, there are situations where 80% of the property value can be depreciated due to the higher value of the building compared to the land.
If depreciated over the shortest time frame of four years, a US$1 million house could provide a Japanese resident with up to US$200,000 a year in depreciation.
This loophole has effectively been closed after a cabinet decision was made on December 20, 2019, with the new tax measures set to kick in from 2021. Not only will this change apply to new buyers of offshore real estate, but it will also apply to existing owners of overseas investment properties, essentially leaving investors with just 12 months left to claim depreciation.
Back in 2015 the Board of Audit advised the Ministry of Finance that using Japan’s method of depreciation on overseas real estate was unsuitable and recommended a revision of the policy.
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