If you own real estate for rental, fixed asset tax and city planning tax are typical expenses that can be recorded as necessary expenses for real estate income. On the other hand, all property taxes on assets unrelated to your home or business cannot be expensed.
The National Tax Agency explains that necessary expenses for real estate income are expenses that are directly necessary to obtain real estate income and can be clearly distinguished from household expenses. A typical example is fixed asset tax on rented land, buildings, etc.
In this article, we will explain cases in which fixed asset taxes can and cannot be expensed, examples of journal entries, apportionment of housework, and points to note when filing tax returns.
Can fixed asset tax be considered an expense?
In principle, fixed asset taxes on assets owned to generate real estate income, such as rental apartments, rental condominiums, rental stores, and rental parking lots, can be treated as necessary expenses. It is common to use "taxes and public dues" as the account title.
| How to use assets | Recording expenses |
|---|---|
| Apartment for rent | Expenses as a general rule |
| A room in a rental apartment | Expenses as a general rule |
| Rental parking lot | Expenses as a general rule |
| Home and office | Apportioned according to business ratio |
| Complete home | As a general rule, no expenses are allowed |
| Idle assets | Confirmed by relationship with income |
The point is not whether the fixed asset tax itself is an expense, but whether the fixed asset is used to generate income.
Taxes that can and cannot be classified as public tax
The treatment of real estate income and business income as expenses differs depending on the type of tax.
| Taxes that are easy to expense | Contents |
|---|---|
| Fixed asset tax | Tax on rental land and buildings |
| Urban planning tax | Tax on land and buildings within urbanized areas |
| Business taxes | Business-related taxes |
| Registration and license tax | Items related to acquisition of business/rental assets |
| Real estate acquisition tax | Items related to rental asset acquisition |
| Stamp tax | Items related to contract preparation |
On the other hand, income tax, resident tax, inheritance tax, national health insurance tax, national pension insurance premiums, fines, traffic fines, etc. are not normally required expenses. The National Tax Agency's guide to income and expenditure statements also distinguishes between taxes that are included in taxes and public dues and taxes that are not.
Journal entry example for property tax
Fixed asset tax can be recorded as an expense at the time of payment or as an accrual when the tax is levied. It is important that you continue to process it in the same way.
How to process at the time of payment
This is the case where fixed asset tax of 100,000 yen is divided into 4 periods and 25,000 yen is paid each time using a savings account.
| Debit | Amount | Credit | Amount |
|---|---|---|---|
| Taxes and dues | 25,000 yen | Ordinary deposit | 25,000 yen |
It's a simple and easy to understand method. This process is sometimes used by small individual owners.
How to record the full amount when determining the levy
This is when you receive a tax notice and record the annual tax amount of 100,000 yen as unpaid.
| Debit | Amount | Credit | Amount |
|---|---|---|---|
| Taxes and dues | 100,000 yen | Accounts payable | 100,000 yen |
At the time of each period's payment, the unpaid amount will be erased.
| Debit | Amount | Credit | Amount |
|---|---|---|---|
| Accounts payable | 25,000 yen | Ordinary deposit | 25,000 yen |
If you record unpaid amounts, check to see if any unpaid amounts remain at the time of closing.
Apportionment of home/office/rental housing
If you use part of your home as an office or own a rental property, you may not be able to deduct all of your property tax as an expense. The amount will be divided proportionally based on the percentage used for business or rental purposes.
| Apportionment method | Suitable cases |
|---|---|
| Proportional division of area | Home/office/rental housing |
| Apportioning usage time | When using some space for a limited time |
| Proportional division by room | When office rooms are clearly divided |
| Apportionment of rental portion | Housing combined with stores, housing combined with rental |
It is best to be able to explain the basis for apportionment using drawings, area, usage conditions, photos, etc. In a tax audit, the rationality of the proportion of expenses will be questioned.
Be careful about property tax settlement amount when buying or selling
When buying and selling real estate, it is common to settle property taxes and city planning taxes on a daily basis on the day of delivery. The tax treatment of property tax settlement funds paid by the buyer to the seller may be different from normal property tax.
The National Tax Agency has indicated that the settlement amount equivalent to fixed asset tax and city planning tax paid when purchasing a rental apartment will be treated as being included in the acquisition price, rather than as a necessary expense for real estate income.
It is easy to make a mistake on this point, so please separate the settlement amount at the time of purchase and the fixed asset tax to be paid to the local government after ownership.
Points to note when filing a final tax return
When recording fixed asset tax as an expense, note the following points:
- Keep tax notices, receipts, and account transfer records.
- Separate rental and home use
- Be able to explain the basis for apportionment
- Do not confuse settlement proceeds at the time of purchase and sale with regular property tax.
- Do not mix taxes that cannot be treated as expenses, such as income tax and resident tax.
- Continue with annual treatment methods
When declaring real estate income, you will need to include not only fixed asset tax, but also depreciation, repair costs, management costs, interest on loans, insurance premiums, etc. Tax treatment varies depending on individual circumstances, so if in doubt, please check with a tax accountant or tax office.
I also want to read
- What happens when the useful life of real estate ends? Impact on depreciation, financing, and cash flow
- Flow of selling a used condominium | 6 steps from appraisal to brokerage contract, delivery, and final tax return
- What is the yield of apartment management? Explanation of surface/substance calculation methods, initial costs, and precautions
Frequently asked questions
Q. Can I claim my home's property tax as an expense?
As a general rule, if your home is a complete home, you cannot claim it as an expense. If you use your home/office for business, etc., the amount will be divided at a reasonable rate.
Q. Is the property tax for rental condominiums a full expense?
As a general rule, if the property is used to generate rental income, it can be treated as a necessary expense. However, if there is a private portion, apportionment is required.
Q. Is it better to make a journal entry for fixed asset tax, at the time of payment or when the levy is determined?
Both methods are possible. It is important to select a method according to the size, accounting treatment, and settlement policy, and to process it continuously.
Q. Is the late payment fee for non-payment of property tax an expense?
Late fees and additional charges may be treated as not necessary expenses. Be careful not to confuse it with regular taxes.
Reference/Citation
