Good eveningš
This is Shumaru.
Today, I would like to write about “real estate investment and taxes,” which I learned about through my work.
The other day, I had the opportunity to speak with the president of a real estate company.
The topic was financing for income-generating real estate and the future of the real estate market.
Among those topics, what left a particular impression on me was the purchase of income-generating real estate targeting wealthy clients and the mechanism of tax savings utilizing depreciation.
When people think of real estate investment, they tend to focus on rental income, property prices, and yields.
However, in reality, there are also those who make investment decisions while taking the tax system into account.
This time, I will organize the information I was taught at that time in my own way.
1. Old wooden properties and 4-year depreciation
First, what left an impression on me was the depreciation of used wooden properties.
Fixed assets such as buildings are not expensed in full in the year of purchase, but are instead recorded as expenses over multiple years according to their statutory useful life and other factors.
For example, the statutory useful life of a wooden building for residential use is 22 years.
So, what happens when you purchase a used wooden house that is over 22 years old?
For used assets, a calculation method called the “simplified method” can be used under certain conditions.
For assets that have already exceeded their entire statutory useful life, the useful life is calculated using the following formula.
Statutory useful life Ć 20%
In the case of this wooden house,
22 years Ć 20% = 4.4 years
is the result.
Since fractions of less than one year are rounded down, the useful life is 4 years.
In other words, if it is an old wooden house that meets certain conditions,
there is a possibility that the building can be depreciated over a relatively short period of 4 years.
This was the interesting part of this story.
2. Tax saving mechanisms that the wealthy focus on
So, why do wealthy clients purchase such properties?
One reason is the reduction of income tax burden by utilizing depreciation expenses.
For example, suppose an individual with a high salary income acquires an income-generating property.
If you depreciate the building portion over a short period, the annual necessary expenses become large.
As a result, the real estate income, which is the rental income minus the necessary expenses, may become a deficit.
In the case of individuals, a deficit in real estate income can be offset against other income such as salary income under certain conditions.
This can reduce taxable income, and as a result, potentially lower the burden of income tax and resident tax.
In other words, it is a strategy of aiming to reduce the tax burden through depreciation while holding income-generating real estate.
Of course, not all losses can be offset against other income.
For example, the portion corresponding to interest on loans for acquiring land is not eligible for loss offsetting.
Also, depreciation is an expense that does not involve cash outflow.
Therefore, a difference between accounting profit and actual cash flow is also a characteristic of this mechanism.
3. The price allocation between land and buildings is also important
Another thing that was interesting was
the price allocation between land and buildings.
When purchasing real estate,
the tax treatment differs between land and buildings.
Land cannot be depreciated, but buildings can be depreciated.
Therefore, for investors who prioritize depreciation, the proportion of the purchase price accounted for by the building is important.
For example, suppose you acquire an income-generating property for 100 million yen.
If the price allocation is 70 million yen for land and 30 million yen for the building,
the portion subject to depreciation is basically the 30 million yen for the building.
On the other hand, if the allocation is 50 million yen for land and 50 million yen for the building,
the acquisition cost of the building becomes larger, and the depreciation expense may also become larger.
The price composition of land and buildings may differ depending on the region.
For example, in rural areas, there are properties where land prices are relatively low and the building price ratio is high.
Conversely, in the Tokyo metropolitan area and the three major metropolitan areas, there are cases where land prices are high and the building price ratio is relatively low.
That is where the evaluation by a real estate appraiser comes into play.
If the price allocation in the sales contract does not properly reflect the actual situation,
there is also a method of reasonably separating the prices of land and buildings by referring to evaluations by real estate appraisers, etc.
However, this does not mean that you can freely save on taxes by simply increasing the building ratio.
It is necessary to have a price allocation based on objective evaluation and rational grounds.
4. Tax saving does not mean eliminating taxes
Such short-term depreciation of used real estate has
long been known as a tax-saving method for the wealthy.
In particular, there are cases where real estate is utilized
for the purpose of reducing the burden of income tax and inheritance tax.
However, tax treatment is not uniform.
For example, regarding tax savings utilizing overseas used buildings,
a system has been established since 2021 to limit the profit and loss offset for losses caused by certain depreciation expenses.
Also, regarding domestic used real estate, tax treatment differs depending on the acquisition status of the property and the details of the borrowings.
Furthermore, accelerating depreciation also means
that the book value of the building decreases quickly.
When selling the real estate in the future, this will also affect the calculation of acquisition costs, potentially leading to higher capital gains.
In other words, even if the immediate tax burden is reduced, it is necessary to consider the situation up to the time of future sale.
I believe it is important not to judge based solely on tax-saving effects, but also to consider the profitability of the property itself and its potential for future resale.
5. The fascination of practical work that you cannot learn from textbooks alone
What I felt once again through this discussion is that real estate investment is not something to be judged simply by the yield of a property.
The purchaser’s income status, purpose of ownership,
tax treatment, and the allocation of price between land and building.
Investment decisions are made by combining various factors.
Even if you study taxes and depreciation on a regular basis, there are not many opportunities to learn how they are actually utilized in real-world transactions.
By hearing from someone who actually deals with real estate, as we did this time, I was able to learn about the practical way of thinking that you cannot find in textbooks.
After all, it is important not only to acquire knowledge but also to understand how it is used in actual society.
I would like to continue organizing and sharing the lessons I have learned through my daily work and conversations with others in my own way.
Thank you for reading until the end.
What are your thoughts on real estate investment and depreciation?
See you in the next article.
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*This article organizes the mechanics of real estate investment and depreciation based on conversations with real estate professionals and personal learning. Tax treatment varies depending on the property’s condition, acquisition terms, and an individual’s income status. The content provided is an introduction to general systems and does not recommend specific investments or tax filings. Please consult with a tax accountant or other professional for actual decision-making.
