In apartment management, taxes must be paid on the profit remaining after necessary expenses are deducted from the income earned. Understanding expenses correctly and recording them appropriately is the first step toward tax savings and stable real estate management. In this article, we explain the types of costs that can be treated as expenses in apartment management and four points that help with tax savings.
What are "expenses" in apartment management?
Expenses are payments made directly in connection with business activities that can be recorded as costs. In apartment management, the standard for whether something qualifies as an expense is "whether the payment is directly related to apartment management".
The main costs that can be recorded as expenses are as follows.
- Repair costs: Equipment maintenance costs, wallpaper replacement when a tenant moves out, and similar items. As a general rule, amounts under JPY 200,000 per case can be expensed in full at once.
- Utilities: Electricity for common areas (such as security cameras) and water charges.
- Transportation costs: Round-trip transportation expenses for meetings with the management company or property inspections.
- Depreciation: Depreciation on buildings and equipment. This is an accounting expense that does not involve an actual cash outlay.
There are also costs, such as transportation expenses, that can easily be mixed with private use. Only spending related to apartment management itself can be recorded as an expense.
What is not recognized as an expense?
If non-deductible costs are recorded as expenses by mistake, they can become an issue in a tax audit. Let us review the main items that are not treated as expenses.
Loan principal
For apartment loan repayments, the principal portion is not an expense. This is because borrowing and repaying money are not treated as profit or loss for accounting purposes. Only the interest portion can be recorded as an expense.
Payments to family members under white return filing
Under white return filing, compensation paid to a spouse or relatives generally cannot be recorded as an expense as "salary for a dedicated family worker." If tax savings are a priority, consider switching to blue return filing. Even under white return filing, the "white return business worker deduction" may apply depending on the conditions.
Capital expenditures (costs that increase the apartment's value)
"Capital expenditures" are outlays intended to increase a property's value or strengthen its durability. Examples include renovation costs for a change of use and the cost of installing an emergency staircase. If repair costs exceed JPY 200,000 per case, they are treated as capital expenditures and cannot be recorded as an expense in full at once.
Personal taxes
Income tax, corporate tax, resident tax, gift tax, fines, and similar items are not recognized as necessary expenses. However, real estate acquisition tax and fixed asset tax can be recorded as expenses as "taxes related to real estate."
Four points to know for tax savings
To maximize tax savings in apartment management, make use of the following four points.
1. Allocate mixed-use costs proportionally
Household allocation is a method of dividing expenses used for both business and private purposes according to the share of use. For example, if you use a car for property inspections, only the gasoline cost corresponding to the share used for apartment management can be recorded as an expense. It is accepted as long as the tax office can regard the allocation method as reasonable.
2. Reduce taxable income through profit and loss offsetting
Profit and loss offsetting is a method of combining income that incurred a loss with other types of income in order to reduce taxable income. Business income, real estate income, capital gains income, and forestry income are eligible. For example, if apartment management runs at a loss in a given year, combining that loss with business income can reduce overall taxable income.
3. Keep receipts properly
Supporting documents must be retained in order to record expenses. For blue return filing, they must be kept for 7 years (or 5 years if income for the year before last was JPY 3 million or less), and for white return filing, for 5 years. Managing them by month in envelopes or accounting software is efficient.
4. Consider incorporation
When income exceeds JPY 9 million, incorporating may make it possible to lower the tax rate. A corporation also broadens the range of items that can be recognized as expenses, increasing the tax-saving effect. If the scale of your apartment management is growing, consider consulting a professional.
Related reading
- Why is real estate investment said to be "not worth it"? Risk analysis and practical measures that lead to success
- What is a successful strategy for real estate investment in Tokyo? An expert explains key points on area selection, yields, and risk diversification
- Is real estate investment difficult because of a lack of comprehensive capability? An explanation of the three barriers of tax, law, and construction
Frequently Asked Questions (FAQ)
Q. To what extent are apartment management expenses recognized?
A. Spending that is directly related to apartment management is eligible. Typical expenses include repair costs, management fees, depreciation, interest, and advertising costs. If there is mixed private use, the costs should be allocated proportionally.
Q. What is the difference between repair costs and capital expenditures?
A. Repair costs are for maintaining the current condition (generally under JPY 200,000 per case), while capital expenditures are for increasing value or strengthening durability (with JPY 200,000 or more as a guideline). The latter cannot be expensed in full at once and must be depreciated.
Q. Which is more advantageous for tax savings, white return filing or blue return filing?
A. Blue return filing is more advantageous. It allows salary for dedicated family workers to be recorded as an expense and also provides a special blue return deduction of up to JPY 650,000.
Q. With which types of income can profit and loss offsetting be combined?
A. Losses from real estate income can be offset against business income, employment income, temporary income, and similar categories. However, the interest portion of a loan used to purchase land is excluded from offsetting.
Q. When is a good time to incorporate?
A. In general, the tax-saving benefits of incorporation begin to appear when taxable income exceeds around JPY 9 million. We recommend consulting a tax accountant and preparing a projection.
