Selling Inherited Property in Japan

Inheriting a property in Japan, especially when you don’t have much knowledge of Japanese real estate, can present challenges when you want to sell, rent, or keep it. Most people are supported by legal representation, such as lawyers, who handle the estate settlement, and for various reasons, they often end up selling their inherited properties.

However, since attorneys are usually not real estate experts, they may not have sufficient market knowledge to help you maximize the value of your property.

To make the most of your inherited asset, you might want advice from a realtor who understands the market and can guide you toward achieving your goals. A realtor can either work closely with your attorney, or take the real estate aspects of the real estate settlement.

Several options are available, each with different financial and personal considerations:

Selling the Property: Many heirs choose to sell inherited real estate, especially if they do not want the responsibility of managing the property, or if multiple heirs cannot agree on its future use. Selling the property can help convert it into cash, but it is important to consider capital gains taxes and current market conditions that may impact the final sale price. (go to Selling section)

Renting the Property: For those who wish to keep the property as their investment portfolio, renting can be a valid option. However, managing a rental property requires a reliable management company that you can trust to oversee the lease. (go to Renting section)

Possessing the Property: If the home has sentimental or practical value, keeping it may be an option. However, heirs should consider ongoing running costs, maintenance fees, and taxes, which can add up significantly over the years. (go to Owning section)

Selling

Selling Your Inherited Property

Who should represent you in the sale

This can be your legal representative who handles the estate settlement, your real estate agent, family member who lives in Japan, or a trusted friend. The legal representative should have all the necessary documents for the real estate sale, as these are typically used for the overall inheritance procedure. Therefore, even if the legal representative is not directly involved in selling your property, they would be able to provide the required documents to whom you appoint.

Nevertheless, if your legal representative does not represent you, a power-of-attorney must be granted to your chosen representative, along with a signature and residence certificate notarized by a notary public in your country (or by an embassy if you live outside of your home country).

The best timing to sell

Japan provides exemption that allows heirs to exclude up to 30 million yen (20 million yen per heir if there are more than 3 heirs) of their capital gain from taxation when selling a decedent’s primary residence (自己の居住用 Jiko-no-kyo-ju-yo) that was solely resided in by the decedent, provided that the below conditions are met. As a result, you may not need to pay capital gain tax at all if this applies to your case. If you expect to gain more than 30 million yen from selling your inherited property, it is generally best to sell your inherited property within the three-year timeframe (by Dec.31st of the third elapsed year) to maximize the available tax benefits.

Conditions:

The property must have been the decedent’s primary residence and must have become an Akiya (unused home) upon inheritance
The house must have been built before May 31,1981
Cannot be an apartment unit and must be a detached house
The sale must occur by December 31 of the third elapsed year from the opening of the estate
The sales proceed must be less than 100 million yen

If this tax benefit is not available to you, there is still a special tax provision that allows a certain portion of the inheritance tax paid at the time of inheritance to be added to the acquisition cost when calculating the taxable capital gain for the purpose of capital gains tax.

The requirements for applying this special provision are as follows:

The property must have been acquired through inheritance or bequest.
The person who acquired the property must have been subject to inheritance tax.
The property must be sold within three years from the day following the inheritance tax filing deadline, which itself is due ten months after the date of inheritance.

If the inherited property was not your decedent’s primary residence and you will gain from selling it, the capital gain tax rate that will apply varies depending on the holding period, in other words, whether the gain is short-term or long-term. In most case, since the holding period can be counted from when your decedent first acquired the property, the capital gain tax will be calculated based on the long-term rate. If this applies to your case, you can choose to sell when market conditions are most favorable, rather than being rushed to sell right after the inheritance distribution.

Capital Gains Tax

Capital gains tax ( 譲渡税 Jo-tow-zei) is a tax levied to individuals and corporations on the profit earned from the sale of their real estate property. Please take note that this is not imposed on your total sale proceeds but on the gain only, so if there is no gain then you do not get taxed. Calculating capital gains tax involves determining the taxable capital gain and then applying the applicable tax rate.　If the property that you are selling meets the conditions of a decedent’s primary residence, a 30 million yen special tax reduction or exemption is available towards your capital gain. If there is any remaining gain after the 30 million yen reduction, it is taxed at the same short-term/long-term rate. Taxable capital gain can be obtained by using this formula below.

Taxable capital gain = Proceeds from sale – (acquisition fees + conveyancing fees) － special tax reduction for decedent’s primary residence sale

Acquisition fees

Purchase price, construction cost, renovation fee, with depreciation cost deducted
Registration tax, acquisition tax, stamp duty
Surveying fee and land preparation costs
If you do not know or cannot prove your acquisition fee, only 5% of the proceeds from your sale can be counted

Conveyancing fees

Agency fee
Stamp duty
Eviction fee to sell your property vacant
Demolition fee to knock your house down in order to deliver as vacant lot

Capital gains tax for decedent’s non-primary residence (or if the sale occurs after December 31 of the third elapsed year from the opening of the estate)

Short-term possession

If the holding period dating back from your decedent’s is 5 years or less (counting from Jan 1st of the year of purchase, not 5 years from the purchase date)

Taxable capital gain ×　30.63% (+9% of municipal tax)

Long-term possession

If your holding period dating back from your decedent’s is more than 5 years (counting from Jan 1st of the year of purchase, not 5 years from the purchase date)

Taxable capital gain ×　15.315% (+5% of municipal tax)

Municipal tax will not be imposed in both long-term and short-term sale if you are a non-resident. However, in principle, this only applies if you do not possess any properties whatsoever in Japan as of January 1st of the following year of the sale. If you possess an office, a business facility, or any other real estate in Japan which can be used as residence, municipal tax will apply.

Capital gains tax must be paid and tax reduction application reported between Feb.16 – March 15 of the following year of the sale at your nearest local tax office. You will need to request your attorney, family member, or your agent to be your tax representative to handle this procedure.

Withholding Tax

When a non-resident (非居住者 He-kyo-jusha) sells a property in Japan, the buyer is required to withhold 10.21% of the purchase price and pay it to the tax authorities before the 10th day of the following month of the sale. This withholding tax (源泉徴収税 Gensen-choshu-zei) serves as an advance payment towards the seller's potential capital gains tax liability. If the paid tax is different than the actual capital gains tax (譲渡税 Jo-tow-zei), the seller or seller’s appointed tax representative (納税管理人 No-zei-kanri-nin) will have to appropriate the sufficiency or insufficiency by filing income tax returns (確定申告 Kakutei-shin-koku) during Feb. 16 – March 15th of the following year of the sale. However, under certain circumstances, withholding tax is not required, so check below to see whether it is applicable to your buyer or not.

Avenue Far East is neither qualified nor authorized to give legal or tax advice, and any such advice shall be obtained from an appropriate, qualified professional advisor of your own choosing. Moreover, the stated requirements may be revised at any time and the information may not be up to date or accurate.

money, contract, plastic model home, keys.jpg

Selling Flowchart

Receive an assessment and decide on your selling price

Decide who you will entrust (lawyer, family, agent, etc.) to take part in your property sale.

Sign representation agreement (媒介契約書 Baikai-keiyaku-sho) with agent and get your property listed on the market

Receive periodic reports of sales activity from your agent and adjust sale price if needed

When an offer comes in, review the buyer’s conditions with the guidance of your agent

When the sales contract is signed, there’s a deposit (手付金 Tetsu-kay-kin) payment from the buyer, which can be received by either yourself (if you are directly involved in the process) or by the person you entrusted. There could be a withholding tax (源泉徴収税 Gensen-choshu-zei) obligation by the buyer, in which case the deposit you will receive from the buyer will be less the amount of tax withheld. This applies likewise when receiving the outstanding settlement from the buyer upon closing (refer to the below section Withholding Tax).

Start to prepare for closing

Communicate via meetings, calls, email, etc., with the judicial scrivener (司法書士 Shiho-shoshi) who will be transferring your ownership title, etc., which is mandatory prior to closing, for the purpose of verifying your identity as the property seller

Prepare necessary items for selling

Receive final settlement from the buyer and in exchange deliver your property

Wait for the judicial scrivener to process registration of ownership title transfer immediately after closing

Appoint a tax representative (納税管理人 N0-zei-kanri-nin) to file your income tax returns on your behalf between February 16 and March 15 of the year following the sale, if the buyer paid any withholding tax or if you have a capital gain from the sale. This could potentially be the same person that you have entrusted with selling your property.

Necessary Items for Selling

Necessary Items

Signature and residence certificate notarized by a notary public in your country (or by the embassy if you live outside of your home country now)
Title deed (Kenri-sho or Toki-shiki-betsu-joho)
ID copies (passport, driver’s license, or other photo IDs)

When will you need it

Upon signing the sales contract and at closing

Costs to Sell

Stamp duty (収入印紙 Shu-new-inshi)
Demolition fee (if the house needs to be demolished in order to sell it as empty lot)
Land survey fee (the land needs to be surveyed, and all adjacent boundary points must be marked before the handover)
Agency fee {(Sale price×3%) + 60,000 yen} + consumption tax

Renting

The scope of services you receive from a real estate company when renting out your property as an offshore landlord can be very comprehensive. One of the most important services is receiving the monthly rent from the tenant. If you do not have a Japanese bank account, it can be overwhelming for the tenant to make rent payments to an overseas account each month. You will need to entrust a real estate company to receive it on your behalf.

The most hassle-free way to operate your rental business is to entrust powers to a real estate company who you trust.

Here is a list of tasks for the entrusted real estate company to do when operating and managing a rental contract.　

List of tasks done by real estate company

source tenants

examine application and give advice whether to accept the applicant or not

preparing lease contracts and other paperwork
receive the monthly rent
arrange cleaning service, restoration and repair work when needed but only upon consent
being point of contact for any requests from tenants during a rental term, and sending out notices when needed
spot inspection with tenant upon contract termination

Two Types of Lease You Can Conclude with Your Tenant

When you rent out your property there are 2 types of contracts you can conclude with your tenant and the simple difference is whether to limit the leasing period or not. A contract that has a limited leasing term is called a fixed-term lease (teiki-shakuya-keiyaku 定期借家契約) and a contract that does not is called a renewable lease (futsu-chintaishaku-keiyaku 普通賃貸借契約).

Here are some advantages and disadvantages of each type of lease contract.

Advantages

Fixed-term lease

If you have plans to use the property for yourself or for someone else in the future, you can end the contract at the end of the term.
If you have plans to sell your property, it is better to keep the option to sell it without a tenant in order to broaden the buyer base, and you can end the contract at the end of the term.
When your property is old and it is unpredictable when it may be torn down, it is best to keep the contract as a fixed-term lease. You can wait until the term comes to an end to avoid paying hefty eviction fees to the tenant.
If you are unable to reach an agreement with the tenant to increase the rent due to unavoidable economical factors, you may end the contract at the end of the term.
If the tenant is unreliable in paying rent on time or has a history of delinquent payments, you can end the contract with the tenant at the end of the term.
If the lease term is 4 years or longer, you can save the tenant the renewal fees that are usually required under a renewable lease. This may encourage the tenant to rent for a longer period.

Renewable lease

You can encourage the renter to keep renting by keeping the lease conditions the same or in terms comparable with the ongoing market.
You can earn renewal fees every 2 years at a maximum of 1 month’s rent.

Disadvantages

Fixed-term lease

You may have a hard time finding a tenant if the lease term is too short.
You may need to bring your rent down to 70 – 90% of the market rates and/or lower the renter’s initial fees by not charging key money, if the lease term is shorter than 2 years. Although this all depends on how much demand there is for your property.

Renewable lease

Even if you have an undesirable tenant, it may not be easy to evict them from your property.
You will not be able to easily take back possession of your property to use it for yourself or for some other people, unless you have a justifiable cause. But even then, you may have to pay eviction fees to a certain extent.

Withholding Tax

When the landlord is a non-resident renting out a property in Japan, a corporate renter is required to withhold 20.42% of the monthly rent and pay it to the tax authority each month before the 10th day of the following month (this does not apply to individual renters). This withholding tax (源泉徴収税 Gensen-choshu-zei) serves as an advance payment towards the landlord's potential income tax liability. If the paid tax total is different than the actual income tax amount, the landlord or landlord’s appointed tax representative (納税管理人No-zei-kanri-nin) will have to appropriate the sufficiency or insufficiency by filing income tax returns (確定申告 Kakutei-shin-koku) during Feb. 16 – March 15th of the following calendar year. The renter may be exempted from paying withholding tax if the landlord possesses an exemption certificate, or if there are tax treaties between Japan and the landlord’s country, and if the necessary paperwork is filed by both the landlord and the renter.

Rental Flowchart

Receive a rent assessment and decide on the asking rent and the type of rental contract (fixed-term or renewable) that you want to conclude with the tenant.

Contact a real estate company and start sourcing for a tenant. If you have inherited a tenanted property, have your real estate company take over the management from decedent's appointed management company, if any exists.

When an application comes in, examine it with the guidance of your agent and decide if you accept the offer or not.

Sign the lease agreement and receive payment of the contract fee.

Rely on your management company to respond to repair requests from the tenant during the lease term. Your management will check if the claim is appropriate and relay details to you. If repair is necessary, your management company will arrange it.

Rely on your management company to handle all necessary paperwork during the lease term. If any document needs signing, such as renewal (re-contract) contracts and termination notices, they will be sent to you.

Income and Expenditure

Income

Monthly rent
Key money (2 months at most, but easier to find tenant if waived)
Renewal fee (1 month at most upon contract renewal every 2 years)
Re-contract fee (1 month at most upon concluding a new fixed-term contract)
Deposit (2 months at most, but technically this money does not belong to you and will be used to clean and restore the room to its original condition after the tenant moves out. Any remaining balance after deducting cleaning and restoration fees shall be returned to the tenant)

Expenditure

Agency fee (1 month’s rent + tax)
Income tax (paid between Feb.16 - March 15 of the following year against income earned between Jan.1 - Dec.31)
Agent service fee for receiving monthly rent on behalf of landlord (few percents of the monthly rent)
Agent’s renewal (re-contract) processing fee (25~50% of the renewal fee) for handling renewal (re-contract) contract for another term

Owning

Unlike some other countries in the world, taxes and ongoing running costs of owning a property are the same for foreigners as they are for Japanese nationals.

You will need to seek help from someone in Japan to handle these payments, as they are generally expected to be settled in cash or through a Japanese bank account debit.

Below are some of the main taxes and costs you should expect as a property owner in Japan.

Property Taxes

Between April and June of every year, the owner of the property as of January 1st is notified to pay property tax for the building and land that they own. Property tax is categorized in two types of taxes. Fixed asset tax and City planning tax.

Fixed Asset Tax

Fixed asset tax amount is calculated by applying the standard tax rate of 1.4% to the value registered in the fixed asset tax ledger.

If the land is a residential land, the taxable value registered in the ledger can be reduced to one-sixth, but only up to 10 times the floor space of the building and 200sqm as the maximum.

If the land is non-residential land, then it’s reduced to one-third and other conditions remain the same as residential land.

There are other applicable land asset tax reductions, for example, if a new house was built, if seismic reinforcement was carried out, if barrier-free modifications were carried out, or energy-saving renovations were applied to the building.

City Planning Tax

City planning tax is applied to houses and land located within the designated city planning area. This tax is collected to fund urban planning projects and land replotting or redevelopment projects.

City planning tax is calculated by applying the standard tax rate of 0.3% to the value registered in the fixed asset tax ledger.

As with fixed asset tax, if the land is residential, the registered value can be reduced to one-third, but only up to 10 times the floor space of the building and 200sqm as the maximum.

If the land is non-residential, two-thirds of the value is reduced, and the other conditions remain the same as residential land.

Ongoing Costs

Apartment Fees (only for apartments)

Management fee is a monthly fee incurred by owners who own an apartment unit. This fee is paid to the management company, which handles the cleaning of the apartment, garbage disposal, and day-to-day operation of the apartment building, under the direction of homeowner’s association.

The management fee depends on how many units there are in the building, and how many people the cost can be shared. It also depends on the condition of the building, since if there are frequent repairs, more funds are required. As a result, the smaller the apartment or poorer the conditions, they are more likely to have higher management fee per unit.

Sinking funds is a monthly fee incurred by owners who own an apartment unit. This is a pool of money used to cover large-scale periodic maintenance work, which is generally carried out every 13 years or more. The monthly sinking fund depends on factors such as the number of units, the physical size of the building, the building’s age, and how long the homeowners plan to maintain the apartment’s lifespan.

On average, the combined monthly cost of the management fee and sinking fund is said to be around 500 yen per square meter.

Insurance

Housing Insurance Premium

The insurance premium for an apartment and a detached house is different. Generally, apartments are cheaper to insure because owners only need coverage to their exclusive area space, while the common area space is usually insured through the homeowner’s association.

On the other hand, owners of detached houses should insure not only the interior part of their house but also the entire building structure, which results in higher premiums.

The insurance premium for an apartment in a typical household generally ranges between 25,000– 40,000yen per year, while for a detached house ranges between 35,000– 65,000yen per year, including coverage for earthquake damage. The average amount includes coverage for household goods, which owners can choose to include or exclude. However, third-party liability coverage is normally included with household goods coverage, meaning the insurance can cover damage you may cause to neighboring properties or residents, making it potnentially beneficial to have. The lengthiest insurance term one can purchase at one-time is 5 years.

Insurance generally covers damages caused by natural calamity, third parties, and accidental damage caused by the owner, but does not cover damages resulting from lack of maintenance or gross negligence.

Earthquake Insurance

Coverage for earthquake damage is always an additional cost to the insurance premium. Moreover, insurance pay-outs for damage caused by earthquakes are much lower than payouts for other types of natural calamities.

You can insure your property to its full value for most natural calamities except earthquakes. For earthquake coverage, the maximum coverage is typically limited to 30 - 50% of the coverage amount for other natural calamities, and total payouts are generally capped at 50 million yen.

For apartments, earthquake insurance payouts are determined based on damage levels in the common area. For detached houses, and payouts are assessed based on damage to the main structural sections.

For example, if earthquake damage is 20% or less, the payout may be up to 5% of the full insured amount. If the damage is 60% or less, the payout may may be up to 30%, if the damage is 80% or less, the payout may be up to 60%, and only if the property is fully destroyed will the insurance company pay 100% of the earthquake coverage.

Utilities

Utility Fees

If you use your property for more than two or three times a year, it is probably wiser to keep the utility contracts active rather than stopping them each time you return home, as resuming utility contracts can be time-consuming and inconvenient.

The basic monthly cost of keeping water, gas, and electricity contracts active is typically about 5,000 – 8,000 yen per month for an average- sized Japanese house or apartment, even with minimal usage.

Maintenance Costs

When you own a property, although it does differ depending on your holding period and the size of your house, it is generally said that you should expect to pay about 6- 8 million yen over the entire holding period if you want to fix everything.

Unlike apartments, where the sinking fund is allocated toward maintenance costs, when you own a detached house, you need to voluntarily set aside these fees in preparation for future repairs and maintenance.

Below are some of the maintenance costs you should expect as a detached house property owner.

Selling Inherited Property in Japan

Table of Contents

Selling

Selling Your Inherited Property

Selling Flowchart

Necessary Items for Selling

Necessary Items

Costs to Sell

Renting

Two Types of Lease You Can Conclude with Your Tenant

Advantages

Disadvantages

Withholding Tax

Rental Flowchart

Income and Expenditure

Income

Expenditure

Owning

Property Taxes

Fixed Asset Tax

City Planning Tax

Ongoing Costs

Apartment Fees (only for apartments)

Insurance

Housing Insurance Premium

Earthquake Insurance

Utilities

Utility Fees

Maintenance Costs