When selling real estate, one concept that is essential to calculating capital gains is "depreciation."Because a building is assumed to lose value over time, a certain amount must be deducted from the acquisition cost.This article organizes, from a practical real estate transaction perspective, the types of useful life needed to calculate depreciation, the figures by structure type, and the method for calculating elapsed years.
Useful Life as the Basis for Depreciation
To calculate depreciation, the first concept to understand is "useful life." There are several types of useful life, and they are used differently depending on the purpose.
Physical Useful Life
This refers to the period during which a building can physically remain in use. In the case of reinforced concrete buildings, there are examples of use for more than 100 years,and in practice, the actual lifespan of a building is often longer than its statutory useful life.
Statutory Useful Life
This is the number of years used for tax depreciation calculations, and it is set by the National Tax Agency according to structure type.Depreciation for a real estate sale is calculated based on this statutory useful life.
Economic Useful Life
This refers to the period during which a building can continue to generate economic value. Even if it remains physically usable, it is considered past its economic useful life if its market value or rental demand has been lost.
How Depreciation Is Treated in a Sale
In calculating capital gains on a real estate sale, the acquisition cost allocated to the building is the amount remaining after deducting the depreciation-equivalent amount from the original acquisition cost.Building acquisition value × (1 − 0.9 × depreciation rate × elapsed years) is the building value after depreciation. Because land is not subject to depreciation, land and building must be calculated separately.
The depreciation rate differs between non-business use (owner-occupied housing) and business use (rental use). For an owner-occupied home, the rate equivalent to the old straight-line method is used, with a denominator of 1.5 times the statutory useful life.
Statutory Useful Life by Structure Type
The main statutory useful lives for residential buildings are as follows.
- Wood-frame and synthetic resin structures: 22 years
- Wood-frame mortar structures: 20 years
- Steel structures (structural material thickness 3 mm or less): 19 years
- Steel structures (structural material thickness over 3 mm and up to 4 mm): 27 years
- Steel structures (structural material thickness over 4 mm): 34 years
- Reinforced concrete (RC) and steel reinforced concrete (SRC): 47 years
This shows that even for the same "apartment building," useful life varies significantly depending on the structure type.
Useful Life by Use
For non-residential uses, different useful lives are prescribed. For example, an RC office building has a useful life of 50 years, an RC retail building 39 years, and an RC factory building 38 years.When considering an exit strategy for rental management, it is important to confirm useful life based on the combination of use and structure type.
How to Calculate Elapsed Years (Within Useful Life)
The elapsed years from acquisition to sale are calculated by rounding down periods of less than six months and treating periods of six months or more as one full year.For example, if a property is sold 10 years and 8 months after acquisition, the elapsed period is treated as 11 years.
How to Calculate Elapsed Years (When Statutory Useful Life Has Been Exceeded)
If you acquire a used property whose statutory useful life has already been exceeded, its tax useful life is calculated using the following formula.
Useful life ＝ statutory useful life × 20%
For example, if you acquire a 30-year-old wooden apartment building, it has exceeded the 22-year statutory useful life, so22 years × 20% ＝ 4.4 years (rounded down to 4 years)becomes the useful life of the used asset. This formula is why depreciation can be recorded over a relatively short period in used real estate investment.
If only part of the statutory useful life has elapsed, it is calculated using the formula "(statutory useful life − elapsed years) + elapsed years × 20%."
INA&Associates Practical Perspective
The calculation of depreciation is an important issue directly tied to capital gains and tax filing. At the sale consultation stage, we review the allocation between building and land, the structure type, the acquisition date, and the renovation history,and in coordination with a tax accountant, we propose an exit strategy focused on maximizing long-term net proceeds.
Summary
- There are three types of useful life, physical, statutory, and economic, and statutory useful life is used for tax calculations
- 22 years for wood structures, 19 to 34 years for steel structures, and 47 years for RC and SRC structures are the main figures for residential buildings
- Elapsed years are calculated by rounding down periods of less than six months and rounding up periods of six months or more
- For used assets that have exceeded statutory useful life, the new useful life is statutory useful life × 20%
- Because this directly affects capital gains and the profitability of rental management, coordination with a tax accountant is advisable
Frequently Asked Questions (FAQ)
Q1. If I purchase a used condominium, how is its depreciable useful life calculated?
If the building age is within the statutory useful life (47 years for an RC condominium), use "(47 − elapsed years) + elapsed years × 20%." If it has exceeded that period, use 47 × 20% ＝ 9.4 years (rounded down to 9 years).
Q2. Is land subject to depreciation?
No. Land is not subject to depreciation because it is assumed not to lose value over time.
Q3. Do renovation costs affect depreciation?
They are added as capital expenditures and become subject to separate depreciation. Determining whether an expense is a repair cost or a capital expenditure is an important tax issue.
Q4. Do I also need to calculate depreciation when selling my home?
Yes. Because the depreciation-equivalent amount must be deducted from acquisition cost when calculating capital gains, the calculation is necessary even for an owner-occupied home. The tax burden also changes depending on how it is combined with the 30 million yen special deduction.
