It is not always the case that someone who purchases real estate will make a profit.
You may have purchased a home, but due to changes in your living environment, you have decided to sell it.
You sold a house you had lived in for many years, but the price was lower than when you purchased it.
Even after receiving the proceeds from the sale, a mortgage balance remains.
Such circumstances are by no means rare.
Under the Income Tax Act, capital gains from the transfer of land, buildings, etc., are in principle subject to separate taxation.
And, as a rule, losses incurred from such transfers cannot be offset against employment income or business income.
However, there are exceptions for certain residential properties.
One of these is the special provision regarding capital losses on residential property.
In this installment, we will focus on this special provision and organize the calculation issues for taxable income.
1. Capital losses on land, buildings, etc., cannot be offset in principle
First, let’s confirm the principle.
Capital gains from the transfer of land, buildings, etc., are in principle subject to separate taxation, calculated separately from other income.
For example, suppose you have an employment income of 5 million yen and incurred a loss of 3 million yen from selling land you owned for investment purposes.
In this case, you cannot simply calculate it as:
5 million yen – 3 million yen = 2 million yen
This is not necessarily the correct way to calculate it.
This is because, in principle, capital losses from the transfer of land, buildings, etc., are not allowed to be offset against employment income or similar.
However, for residential property, exceptional treatment is provided if certain conditions are met.
Regarding housing, which serves as the foundation of life, tax considerations are made that differ from those for mere investment real estate.
However, not all residential property qualifies for profit and loss aggregation.
It is necessary to accurately grasp the requirements for each system.
2. Capital Losses on Residential Property Associated with Replacement
The first thing to learn is the special provision for capital losses associated with the replacement of residential property.
If certain requirements are met, capital losses from residential property can be aggregated with income such as salary income or business income.
Let’s organize the main requirements covered in the teaching materials.
Requirements for the Asset to be Transferred
Regarding the residential property to be transferred, in principle, it is required that the ownership period exceeds 5 years as of January 1st of the year of the transfer.
What is important here is the point that it is “exceeding 5 years,” not “5 years or more.”
Also, the determination of the ownership period is not simply counting the elapsed time until the date of sale.
It is determined based on January 1st of the year of the transfer.
Requirements for Replacement Assets
There are also conditions for housing, etc., acquired through replacement.
The main requirements include:
-
The property must be a residence, etc., with a floor area of 50 square meters or more
-
Acquiring the replacement asset within Japan within a specified period
-
Putting the property to residential use by a specified deadline, or having the prospect of doing so
-
Having a certain amount of housing loans, etc., for the replacement asset
and so on.
In the teaching materials, an important condition is that as of December 31 of the year of acquisition, one must have housing loans or similar with a repayment period of 10 years or more.
In other words, it is not enough to simply sell an old house and incur a loss; one must also replace it with a house that meets certain conditions.
3. Exercise Problem 155—Selling a house and incurring a loss of 5.92 million yen
Let’s check a concrete example.
A taxpayer sold their house and its land.
The acquisition cost and sale price, etc., are as follows.
Acquisition cost of the house: 12.59 million yen
Sale price of the house: 10 million yen
Acquisition cost of the land: 30.28 million yen
Sale price of the land: 28 million yen
Transfer expenses: 1.05 million yen
First, calculate the total sale price.
10 million yen + 28 million yen
= 38 million yen
Next, total the acquisition cost and transfer expenses.
12.59 million yen + 30.28 million yen + 1.05 million yen
= 43.92 million yen
Therefore, the capital loss is,
38 million yen – 43.92 million yen
= -5.92 million yen
This is the result.
In this problem, the requirements for the special provisions regarding the replacement of residential property are met.
Therefore, the capital loss of 5.92 million yen can be offset against other income.
Suppose your income for this year is as follows:
Employment income of 5 million yen
Occasional income of 3 million yen
This is the assumption.
In the textbook calculation, we first offset it against the 3 million yen of occasional income.
3 million yen – 5.92 million yen = -2.92 million yen
Even after eliminating all of the occasional income, a loss of 2.92 million yen remains.
Next, we offset the remaining 2.92 million yen against the 5 million yen of employment income.
5 million yen – 2.92 million yen = 2.08 million yen
Therefore,
the total income amount is 2.08 million yen
This is the result.
In this problem, you must not multiply the 3 million yen of occasional income by 1/2 first.
This is because the offset of profit and loss is performed first.
It is also important to correctly sum the acquisition cost of the house, the acquisition cost of the land, and the transfer expenses.
You must not judge the amount of loss by looking only at the sale price; you need to understand the calculation structure of capital gains itself.
4. Selling while a mortgage remains
Next, let’s consider a special provision that also applies when there is no replacement property involved.
That is the special provision for capital losses on the transfer of specified residential property.
This is a system related to what is known as an over-loan.
An over-loan refers to a situation where, even after selling a home, the remaining mortgage balance exceeds the proceeds from the sale.
For example, suppose you sell a home for 3.5 million yen.
However, if the outstanding balance of the loan related to that home is 6 million yen,
6 million yen – 3.5 million yen = 2.5 million yen
is the result.
Even if you use all the proceeds from the sale to pay off the loan, 2.5 million yen of debt will remain.
In such a case, by meeting certain requirements, you are permitted to perform profit and loss aggregation for a portion of the capital loss on the residential property.
However, there is a limit to the amount that can be aggregated for profit and loss.
5. Limit on capital losses for specified residential property
Regarding capital losses on specified residential property, the amount that can be aggregated for profit and loss is, in principle, the lesser of the following two amounts.
1. The amount of the capital loss actually incurred
2. The amount obtained by subtracting the transfer proceeds from the balance of the prescribed housing loan, etc.
For example,
Capital loss of 8.5 million yen
Housing loan balance of 6 million yen
Transfer proceeds of 3.5 million yen
In this case, first calculate the amount equivalent to the over-loan.
6 million yen – 3.5 million yen = 2.5 million yen
Compared to the capital loss of 8.5 million yen,
2.5 million yen
is the case.
Therefore, the amount that can be offset against other income is 2.5 million yen.
Even if there is an economic loss of 8.5 million yen due to the sale of a residence, it does not mean that the entire 8.5 million yen can be deducted from other income.
This is important.
The amount of the loss itself and the amount that can be offset against other income do not necessarily match.
6. Exercise Problem 155—Golf Club Membership and Residential Capital Loss
Here, we will consider a problem that combines business income with two capital transfer transactions.
This year’s business income is 16,428,000 yen.
Meanwhile, a golf club membership was sold under the following conditions.
Transfer price: 2 million yen
Acquisition cost: 1.2 million yen
Brokerage fee at the time of transfer: 60,000 yen
The capital gain is,
2 million yen – (1.2 million yen + 60,000 yen)
= 740,000 yen
which is the result.
Also, a loss of 8.5 million yen has occurred due to the sale of residential property.
However, due to the aforementioned special provision regarding over-mortgaged properties, the amount that can be used for profit and loss aggregation is 2.5 million yen.
First, following the example in the teaching materials, we adjust within the long-term capital gains subject to comprehensive taxation.
740,000 yen – 2.5 million yen
= -1.76 million yen
The 1.76 million yen loss incurred here is used for profit and loss aggregation with other income.
Subtracting it from the business income of 16,428,000 yen,
16,428,000 yen – 1.76 million yen
= 14,668,000 yen
This is the result.
The answer is 14,668,000 yen.
What I want to highlight in this problem is that two different treatments appear simultaneously.
First, calculate the profit from the transfer of the golf club membership itself.
Next, determine the amount that can be aggregated for the loss on residential property according to the special provision.
Then, perform internal aggregation and aggregate the remaining loss with business income.
If you were to subtract the 8.5 million yen housing transfer loss from the business income from the start, you would naturally get the wrong answer.
Do not forget to determine the limit amount under the special provision.
7. Capital losses on residential property can sometimes be carried forward
Regarding capital losses on residential property, if certain conditions are met, not only profit and loss aggregation but also carry-forward deductions are permitted.
In principle, this applies to the three years following the year in which the loss occurred.
However, there are important requirements for the carry-forward deduction of capital losses on residential property, such as income limits.
The teaching materials indicate that if the total income for the year in which you intend to claim the carryforward deduction exceeds 30 million yen, it cannot be applied.
It is important to note here that the figure used for this determination is not the taxable income after the loss carryforward deduction.
You must correctly calculate the total income for that year in advance.
Furthermore, for the special provisions regarding replacement, it is also a requirement that you have certain housing loans, etc., related to the replacement asset for the year in which you receive the carryforward deduction.
It is important to consider the determination of whether the special provisions can be applied and the calculation of the carryforward deduction amount separately.
8. Exercise Problem 156 – Determination of 30 million yen income and carryforward deduction
Next, let’s consider a case where a capital loss on residential property is carried forward from the previous year.
This year’s income is as follows.
Real estate income: 20,805,000 yen
Separate short-term capital gains: 3.2 million yen
Separate long-term capital gains: 1.5 million yen
Forestry income: 2.8 million yen
In addition, a net capital loss on residential property of 7 million yen has been carried forward from the previous year.
First, calculate the total income.
20,805,000 yen + 3.2 million yen + 1.5 million yen + 2.8 million yen
= 28,305,000 yen
In other words, 28,305,000 yen is 30 million yen or less.
Therefore, the example in the teaching materials meets the income limit requirement.
Furthermore, since the necessary requirements for housing loans, etc., are also met, the carryforward deduction can be applied.
From here, deduct the 7 million yen loss in the prescribed order.
First, deduct it from the 1.5 million yen in separate long-term capital gains.
1.5 million yen – 7 million yen = -5.5 million yen
The separate long-term capital gains become zero, and a loss of 5.5 million yen remains.
Next, deduct it from the 3.2 million yen in separate short-term capital gains.
3.2 million yen – 5.5 million yen = -2.3 million yen
The separate short-term capital gains also become zero, and a loss of 2.3 million yen remains.
Next, deduct it from real estate income.
20,805,000 yen – 2.3 million yen
= 18,505,000 yen
The 2.8 million yen in forestry income remains as is.
Therefore,
Total income amount: 18,505,000 yen
Forestry income amount: 2.8 million yen
This is the result.
The total taxable income is,
18,505,000 yen + 2.8 million yen
= 21,305,000 yen
.
The answer is 21,305,000 yen.
What is important here is that you must not deduct the 7 million yen carryover loss before determining the 30 million yen income limit.
Also, regarding the carryforward deduction for capital losses on residential property in the teaching materials, there is a prescribed order starting from separate capital gains, then proceeding to total income, forestry income, etc.
It is necessary to confirm this order.
9. There is also a carryforward deduction for capital losses on stocks, etc.
Finally, let’s consider capital losses on stocks, etc.
In principle, capital gains from stocks, etc., are subject to separate self-assessment taxation.
And, the treatment of income amounts and losses differs depending on the type of stocks, etc.
It is necessary to calculate listed stocks, etc., and general stocks, etc., separately.
Here too, for losses that meet the special provisions, a carryforward deduction to the following year and beyond may be permitted.
What is covered in the teaching materials is
capital losses related to specified stocks
and
capital losses related to listed stocks, etc.
carryforward deductions.
Since the institutional requirements differ for each, one must not think that any loss related to general stocks, etc., can be carried forward.
10. Exercise 157—Deducting past losses from stock capital gains
Let’s consider the following stock transfer.
A Listed Stocks
Acquisition cost 2.5 million yen
Transfer consideration 3 million yen
Transfer expenses 40,000 yen
B Unlisted stocks
Acquisition cost 2 million yen
Transfer consideration 4.5 million yen
Transfer expenses 99,000 yen
First, calculate the capital gains from A listed stocks.
3 million yen – (2.5 million yen + 40,000 yen)
= 460,000 yen
Next, calculate the capital gains from B unlisted stocks.
4.5 million yen – (2 million yen + 99,000 yen)
= 2,401,000 yen
Therefore,
Capital gains from listed stocks, etc. 460,000 yen
Capital gains from general stocks, etc. 2,401,000 yen
are obtained.
Now, check the losses carried forward from the previous year.
Capital loss related to specified stocks of specified small and medium-sized companies 1.25 million yen
Capital loss related to listed stocks 700,000 yen
exist.
Both satisfy the requirements for carry-forward deduction in the textbook example.
First, deduct the 1.25 million yen capital loss related to specified stocks from the capital gains of general stocks, etc.
2,401,000 yen – 1,250,000 yen
= 1,151,000 yen
Next, deduct the carried-over loss of 700,000 yen from the 460,000 yen capital gain on listed stocks, etc.
460,000 yen – 700,000 yen
= -240,000 yen
This 240,000 yen cannot be fully deducted from this year’s capital gains on listed stocks, etc.
Therefore, if the necessary requirements are met, it will be carried over to the following year.
As a result, what remains in this year’s taxable income is
the amount of capital gains, etc. related to general stocks, etc., of 1,151,000 yen
.
Distinguish between listed stocks, etc., and general stocks, etc.
Distinguish between losses related to specified stocks and losses related to listed stocks, etc.
And, do not mistake the order of carry-over deductions for each system.
These are the important points of this issue.
11. Things to confirm in the calculation of taxable income
Let’s organize what we have learned so far.
In calculating taxable income, it is important to think in the following order.
First, correctly determine the amount of each type of income.
Second, distinguish between comprehensive taxation and separate taxation.
Third, identify the losses that can be offset against profits.
Fourth, exclude losses and interest portions that are not subject to profit and loss aggregation.
Fifth, perform profit and loss aggregation in the prescribed order.
Sixth, perform the necessary one-half calculation.
Seventh, determine the requirements for carryforward deductions regarding past losses.
Eighth, perform carryforward deductions in the statutory order.
Ninth, determine each taxable income.
If you process these one by one, even complex calculation problems can be broken down and thought through.
What is difficult about the Certified Public Tax Accountant examination is not necessarily the calculation itself.
Which calculation should be performed first?
Which losses can be used?
Which amounts should be halved?
Which income should be treated as a separate category?
Those judgments are what make it difficult.
12. The Order Existing Between Profit and Loss
In the Income Tax Act, profit and loss are not equal.
Even with the same 1 million yen loss, some can be deducted from other income, while others cannot.
Even with the same capital loss on residential property, the treatment changes depending on whether it qualifies as a replacement, whether there is a housing loan, and how many years it has been owned.
Furthermore, even when a loss can be carried forward to the following year, it cannot be deducted without limit.
There are time limits, an order of priority, and income restrictions.
In other words, a loss in the calculation of taxable income is not merely a negative number.
Only by meeting the conditions under tax law can you be granted the power to reduce other income.
This is where the difficulty and the intrigue of calculating taxable income lie.
And there is meaning in repeatedly solving calculation problems.
At first, you might be confused by the sheer number of figures.
However, if you repeat the process of classifying income, identifying losses, and following the order of aggregation, you will realize that there are certain rules even in complex problems.
Before processing a single number, think about what that number means under tax law.
I believe that is the fundamental attitude for understanding taxable income.
Studying for the Certified Public Tax Accountant exam is not just about competing for calculation speed.
It is also training in accurately reading the legal meaning that exists behind the numbers.
This topic of profit and loss aggregation and carryforward deductions was one where I could strongly feel that.
