One of the terms you should understand before starting a real estate investment is “security deposit amortization” (shikikin shokyaku). To maximize returns as a rental property owner, it is essential to understand the differences between a security deposit and an amortized amount, as well as the relevant accounting treatment and tax handling. In this article, we explain how security deposit amortization works, typical market ranges, accounting treatment, and journal entry methods.
What is a security deposit? The basic definition
A security deposit is a guarantee paid by the tenant to the landlord (owner) at the time of signing a lease agreement, and it is used as security for unpaid rent and to cover restoration costs when the tenant moves out. However, deterioration caused by normal wear and tear cannot be deducted from the security deposit, so in some cases the full amount may be returned if the room has been used carefully.
What is security deposit amortization? Its relationship to shikibiki
Security deposit amortization (shikibiki) is a contractual arrangement under which part or all of the security deposit is designated in advance as non-refundable when the tenant moves out. It is used mainly in western Japan, especially in the Kansai area, and is a practice broadly equivalent to “key money” in the Kanto region.
The non-refundable portion (the amortized amount) is used for restoration costs and is clearly distinguished from the remaining refundable portion of the security deposit.
The difference between a security deposit and security deposit amortization
| Item | Ordinary security deposit | Security deposit amortization |
|---|---|---|
| Assumption of refund | Yes (returned after deducting restoration costs) | No (the amortized portion is not returned) |
| Main area of use | Nationwide | Mainly the Kansai area |
| Comparable concept | Deposit/guarantee money (refundable portion) | Comparable to key money (Kanto) |
What is the typical market range for the amortized amount?
A typical amortized amount is equal to one to three months’ rent, and in many cases about 60% of the total security deposit is set as the amortized amount. However, this varies significantly depending on the area, the property, and the owner’s policy. In some cases, properties are set with an amortized amount of four months’ rent or more, so advance explanation to the tenant is important.
How is security deposit amortization treated in accounting?
Security deposit amortization for residential properties is non-taxable, but for business-use properties such as stores and offices, it is subject to consumption tax.
The calculation formula is as follows.
【Amortized amount × tax rate = amortized amount including consumption tax】
Example: if the monthly rent is JPY 100,000, the security deposit is three months’ rent (JPY 300,000), and the amortized amount is two months’ rent (JPY 200,000)
JPY 200,000 × 1.1 = JPY 220,000 (including consumption tax)
In the accounting records, the amount including consumption tax is recorded as a “long-term prepaid expense.”
Which accounts are used for journal entries?
The accounting categories related to a security deposit are generally as follows.
- When holding a security deposit: “deposits received”
- When refunding a security deposit: “cash or bank deposits”
- When recognizing it as an amortized amount: “sales”
For business-use properties, consumption tax treatment is also involved, so confirming the treatment with a tax accountant is recommended.
How can you confirm whether there is an amortized amount?
In many cases, property advertisements such as flyers and portal sites state terms like “security deposit: X months, amortization: X months,” and if that is unclear, you can confirm it directly with the real estate company. If tenants sign a contract without understanding this structure, disputes may arise when they move out, so both owners and brokers need to provide careful explanations before the contract is signed.
FAQ: Common questions about security deposit amortization
Q1. Is security deposit amortization used outside the Kansai area as well?
It is not common in the Kanto region, but property owners can choose to set it voluntarily. However, it must be clearly stated in the contract and explained in advance.
Q2. Must the amortized amount be fully used for repair costs?
The owner may recognize the amortized amount as income that can be used freely. Any portion not used for repair costs may also be recorded as profit.
Q3. Can a tenant refuse the amortized amount?
It can be negotiated before the contract is signed, but it cannot be unilaterally refused after the contract has been executed. From the standpoint of consumer contract law, an excessively large amortized amount may be deemed invalid.
Q4. For business-use properties under corporate lease agreements, how is consumption tax handled?
Security deposit amortization for business-use properties is subject to consumption tax. If the owner is a taxable business operator, journal entries and tax filings must be made based on the amount including consumption tax.
Q5. Can both security deposit amortization and key money be set at the same time?
Legally, yes. However, because this increases the tenant’s psychological burden, it may reduce market competitiveness. In practice, it is more realistic to set the terms based on local custom and prevailing market levels.
