When you earn rental income through property operations, multiple taxes are imposed on your annual income. It is important to understand that the tax structure differs from employment income. In this article, we explain in detail the types of taxes that apply to rental income, how they are calculated, and how to file a tax return.
What Taxes Apply to Rental Income?
If you receive rent through apartment or condominium management, the following five taxes mainly apply.
Income Tax
Rental income is generally classified as "real estate income."If the scale of management is 5 buildings or 10 units or more, it is treated as "business income," which offers advantages such as a broader range of deductible expenses and larger deductions.
Resident Tax
Income tax does not apply if your annual income is 200,000 yen or less, but resident tax must still be paid.If you choose "ordinary collection," you can avoid payroll withholding, which is useful if you do not want your workplace to know about your rental income.
Consumption Tax
Consumption tax is imposed when taxable sales are 10 million yen or more, but residential rentals alone are tax-exempt.Be sure to confirm whether the contract states "for residential use."
Fixed Asset Tax and City Planning Tax
These taxes must be paid every year as long as you own the property.Properties in urbanization zones are also subject to city planning tax.
Real Estate Acquisition Tax
A payment notice will arrive about six months to one and a half years after acquiring the property. Prepare in advance for this sudden expense by maintaining sufficient funds.
What Is Included in Taxable Income? Which Items Can Be Treated as Expenses?
Breakdown of Rental Income
In addition to rent, the following items are also included in rental income.
- Key money, management fees, and renewal fees
- Parking income
- Antenna base station installation fees
- Vending machine income
- Electricity and water charges received as common service fees
Even if a tenant falls behind on rent, it must still be recorded as income originally due.If it becomes uncollectible, it may be recorded as a loss.
Items That Can Be Recorded as Expenses
| Expense Item | Details |
|---|---|
| Taxes | Fixed asset tax, city planning tax, real estate acquisition tax, and stamp duty (resident tax and income tax are not deductible) |
| Insurance Premiums | Various insurance premiums such as fire insurance and earthquake insurance |
| Outsourcing Fees | Fees paid to a management company (around 5% of rent is a common benchmark) |
| Professional Fees | Fees paid to tax accountants and judicial scriveners |
| Depreciation Expense | Allocated over useful lives of 22 years for wooden buildings, 34 years for steel-frame buildings, and 47 years for RC buildings |
| Repair Costs | Wallpaper replacement, equipment repairs, cleaning costs, and repair reserve contributions |
| Loan Interest | Interest on borrowings and loan fees |
| Other | Transportation costs for property inspections and the cost of real estate-related books |
How Do You Calculate the Taxes on Rental Income?
How to Calculate Income Tax
Income tax is calculated in the following three steps.
- Real estate income = Rental income − Necessary expenses
- Taxable income = Real estate income + Other income − Various deductions
- Income tax = Taxable income × Tax rate − Deduction amount
The tax rate is applied on a graduated basis under the progressive tax system.It is 5% up to 1.95 million yen, 10% up to 3.3 million yen, 20% up to 6.95 million yen, and 45% over 40 million yen.
Major deductions include the basic deduction (380,000 yen), social insurance premium deduction, medical expense deduction, spouse deduction, dependent deduction, and the blue return special deduction (up to 650,000 yen).
How to Calculate Resident Tax
Resident tax is calculated at approximately 10% of income.If your income is 6 million yen, your resident tax will be about 600,000 yen.
Is Filing a Tax Return Necessary? Why Should You Do It?
A Tax Return Is Required for 200,000 Yen or More
If your real estate income (rental income − necessary expenses) exceeds 200,000 yen, you are required to file a tax return.Please note that the standard is "income" rather than "revenue."
Why You Should File Even If It Is 200,000 Yen or Less
If you have a loss, you may offset it against employment income through "profit and loss offsetting," allowing you to receive a tax refund.This is an effective tax-saving measure in years when repair expenses become significant.
The Difference Between White Return and Blue Return
| Item | Blue Return | White Return |
|---|---|---|
| Bookkeeping Method | Double-entry bookkeeping | Simple bookkeeping |
| Special Deduction | Up to 650,000 yen | None |
| Loss Carryforward | Available for 3 years | Not available |
| Requirements | Advance submission of an approval application is required | None in particular |
To receive the 650,000 yen deduction, the condition is a management scale of 5 buildings or 10 units or more.
What Happens If You Do Not File a Tax Return?
Heavy Additional Tax
If there was intentional concealment, a heavy additional tax of 35% to 40% will be imposed.
Delinquent Tax
If you miss the deadline, delinquent tax will accrue, and the later the amended return is filed, the larger the amount becomes.
Additional Tax for Underreporting
If the amount declared was lower than the actual amount, a penalty will be imposed in addition to the original tax due.
How Do You File a Tax Return?
The tax return filing period is from February 16 to March 15 each year.Proceed according to the following steps.
- Prepare documents: Withholding slips, purchase and sale agreements, loan statements, receipts for expenses, etc. (retention period: 7 years)
- Apply for blue return status: Submit the approval application within two months after starting your real estate business
- Prepare the financial statement: Enter income and expenses on the National Tax Agency website and calculate profit
- Prepare the tax return form: Enter the required items on the National Tax Agency website
- Submit the documents: Choose from e-Tax, mail, or bringing them to the tax office in person
With e-Tax, you can submit at any time, 24 hours a day, without having to visit the tax office.
What Points Should You Be Careful About When Filing a Tax Return?
- Year-end adjustment cannot replace it: Even salaried employees must file a separate tax return if they have rental income
- Prepare the necessary documents early: Be careful not to lose withholding slips or various statements
- Avoid excessive expense claims: Proper expense management is also important for maintaining a good evaluation from financial institutions
Summary
Rental income is subject to multiple taxes, including income tax and resident tax. By accurately understanding which items can be recorded as expenses and filing your tax return appropriately, you can maximize tax-saving benefits. If you have any uncertainties, proceed while consulting a professional.
Frequently Asked Questions (FAQ)
Do I need to file a tax return even if my rental income is 200,000 yen or less?
You do not need to file an income tax return, but you are required to file for resident tax. Also, if you have a loss, filing may be beneficial because you may receive a tax refund through profit and loss offsetting.
Do salaried employees also need to file a tax return?
Yes. If your real estate income exceeds 200,000 yen, you must file a tax return separately from your year-end adjustment. If you do not file, you may be subject to penalties.
What items are not recognized as expenses for rental income?
Resident tax and income tax cannot be treated as expenses. In addition, expenditures unrelated to real estate management, or excessive transportation and entertainment expenses, may be questioned by the tax office.
Which should I choose, a blue return or a white return?
If your scale is 5 buildings or 10 units or more, a blue return is advantageous because it allows a deduction of up to 650,000 yen and loss carryforward. Even on a smaller scale, a 100,000 yen deduction is available, so a blue return is generally recommended.
