Real Estate in Japan No.2
Today’s lecture is “How should you rent your apartment?”
Should you rent your apartment as an individual? or Should you incorporate a company to start rental business? I will clarify your questions.
There are several ways to rent your apparent.
1. Without establishing a company
2. Establish a company
a) Company manages the apartment
b) Company subleases the apartment
c) Company owns the apartment
1. Without establishing a company – rent apartment as an individual
Types of Tax: Individual income tax
Type of income: Real estate income
Tax rate: Progressive tax rate, 15% ~ 55% including local taxes
Since real estate income is combined with other income, such as salary incomes or business income, higher tax rate will be applied if your income from other sources are high.
Depreciation, utilities, repair, property management fees, fixed assets tax, interest for loan are treated as the expenses of your rental business.
However, income tax and loan repayment are not treated as deductible expenses.
You can recognize entertainment expenses if these are directly related to the rental business. Also, if the scale of business is large enough, you can pay salaries to your families and reduce your income.
If your rental business is large enough, you can apply for the Blue Form Tax Return.
By being blue form tax return status, you can enjoy the following tax benefits.
・ Income exemption of JPY 650,000
・ Salary to family
・ Loss carry forward for 3 years
・ Full depreciation or amortization of small assets in the first year, acquisition cost is less than JPY 300,000
To be qualified for the blue form tax return status, you need to satisfy the following conditions:
・ Scale of your rent business is large enough (10 rooms or 5 buildings or equal size)
・ You need to file an Application for Blue Form Tax Return to the tax office
2. Establish a company
You should consider establishing your company, GK or KK, to start rental business. There are three types of structures.
a) Your company manages the apartment
You will rent your apartment and receive rent fees. Your company will manage the properties and receive the management fees from you. In this way, you can recognize property management fees and can reduce your income.
Excessive amounts of property management fees are not treated as expenses. The appropriate amount of property management fee is from 5% to 10% of rental income.
b) Your company subleases the apartment
You will rent apartment to your company, and your company will rent the apartment to the lessee.
In this case, your company will manage the properties and take vacancy risk. Thus, you can pay more property management fees to your company and reduce your individual income.
The appropriate amount of property management fee is from 10% to 15% of rental income.
c) Your company owns the apartment
In this case, you will sell your apartment to your company first and your company will rent the apartment to the lessee. You company will recognize all expenses, such as depreciation, repair costs, utilities and salaries to director or employees.
You and your family can become employees of your company and receive the salaries from your company.
This is the most tax effective method since you can transfer your rent income to your company.
From inheritance tax perspective, you can reduce the value of your properties.
However, you need to consider the capital gain when your sell your properties to your company.
Pros & Cons of establishing a company
・ Additional expenses ➡ Management fees, salary etc.
・ Shift profit from individual to corporate ➡ Lower tax rate
・ Loss carry forward period: 9 years for company, 3 years for individual
・ Lower the value for inheritance tax
・ Costs to establish a company (200,000 yen ~ 300,000 yen)
・ Per capita tax: 70,000 yen/year
・ Fees for tax accountant
・ Social insurance of the employees