Rental income from your property business must be reported as real estate income (fudōsan shotoku). Here's an overview of the basics of tax filing (kakutei shinkoku) — deductible expenses and how depreciation works.
- Rental income is taxed as "real estate income" (fudōsan shotoku) — the amount after deducting necessary expenses from total income.
- Management fees, repair costs, casualty insurance premiums, and fixed asset tax can all be booked as necessary expenses.
- The building's acquisition cost is expensed gradually every year as depreciation, based on its statutory useful life.
- Choosing blue-form filing (aoiro shinkoku) can bring tax benefits such as a special deduction.
- For decisions specific to your situation, it's best to consult a specialist (a tax accountant).
The Basics of Real Estate Income
Rental income from your property business is filed as "real estate income," combined with other income such as salary income, on your tax return. The amount of real estate income is calculated by deducting necessary expenses — such as management fees and repair costs — from total income like rent. If the result is a loss, it may in some cases be offset against other income. Because whether you can carry forward a loss or offset it against other income comes with conditions, we'd recommend checking the details with a tax accountant.
Main Items You Can Expense
Common items you can book as necessary expenses include the management fee paid to your management company, building repair costs, casualty insurance premiums, real estate taxes such as fixed asset tax and city planning tax, interest on loans (the portion attributable to the building), and depreciation. Keeping receipts, contracts, and other supporting documents organized makes it easier to confirm everything at filing time. Renovation work that counts as a capital expenditure may not be booked as a one-time repair cost and can instead be subject to depreciation.
How Depreciation Works
Rather than expensing the full acquisition cost of a building or equipment in the year it's acquired, "depreciation" spreads it out, expensing a little each year based on the statutory useful life. Useful life varies by the building's structure — wood, steel, or reinforced concrete each carry a different number of years. Note also that land is not subject to depreciation. Because the calculation method differs for new versus used properties, it's important to accurately record the details of the property at the time of acquisition.
Blue-Form vs. White-Form Filing
There are two types of tax filing: blue-form (aoiro shinkoku) and white-form (shiroiro shinkoku). Blue-form filing requires advance registration and a certain level of bookkeeping, but it can bring a special deduction and other tax advantages. White-form filing is relatively simple procedurally, but falls short of blue-form filing on the deduction amount. Which to choose is a judgment call based on the scale of your operation and how much administrative work you're willing to take on. Qualifying for the blue-form special deduction comes with requirements, such as double-entry bookkeeping and filing on time.
Documents to Prepare Ahead of Filing
Ahead of filing, you'll want to organize your rent payment records, the management report from your management company, receipts for repairs and insurance premiums, the fixed asset tax notice, and your loan repayment schedule. The annual income and expense report your management company issues serves as an important foundation for the filing work. Tax filing season typically runs from mid-February to mid-March, so it's best to prepare your documents with plenty of time to spare.
Dividing the Work Between Your Management Company and Tax Accountant
Many owners handle day-to-day income and expense tracking based on their management company's reports, while having a tax accountant prepare the actual tax return. Tax judgments and questions of tax optimization require specialized knowledge, so we'd recommend consulting a specialist such as a tax accountant based on your particular circumstances.
Frequently Asked Questions
Can the management fee be expensed?
Management fees can generally be booked as a necessary expense of running the rental business. Keep the contract and invoices on file.
Do I have to file the tax return entirely on my own?
It's not required. You can also organize the documents and hand them to a tax accountant. It's worth deciding based on the scale of your holdings and how much administrative work you want to take on.
How is the depreciation expense calculated?
It's calculated from the building's acquisition cost and the statutory useful life for its structure. We'd recommend checking the specific calculation method and depreciation approach with a tax accountant.
Summary
Rental income from managing property must be reported as real estate income, and you can book management fees, repair costs, and depreciation as necessary expenses. It's best to work through the choice between blue-form and white-form filing, and any specific tax decisions, with a specialist such as a tax accountant.