Some rental owners whose income has grown start to consider incorporating (hōjinka) — setting up an asset management company (shisan kanri kaisha), for instance. Here's an overview of what changes when you incorporate, along with the benchmarks for when to start considering it.
- Incorporating your rental business means switching a rental property you personally own and run to being operated through a company — an asset management company, for example.
- Incorporating means corporate tax rates apply instead of individual income tax, and it can widen your options — such as the scope of what counts as a deductible expense and paying salaries to family members.
- Once real estate income exceeds a certain scale, incorporating is said to potentially reduce the tax burden, but this varies by individual circumstances.
- Incorporating comes with costs that don't exist under individual ownership, such as incorporation fees and an accountant's (zeirishi) retainer.
- Whether to incorporate is best judged in consultation with a tax accountant (zeirishi), taking into account your income level, the scale of your properties, and future inheritance planning.
What Incorporating a Rental Business Means
Incorporating your rental business means setting up a company — an asset management company, for example — for a rental property you'd previously owned and run as an individual, and switching to running the business through that company. There are several possible schemes, such as selling the property to the company or having the company own only the building, and the procedures required and the tax implications differ depending on which approach you choose.
What Changes When You Incorporate
Once you incorporate, corporate tax applies instead of individual income tax and resident tax, and your tax options may expand — you can split income among family members as director compensation, and the range of what counts as a deductible expense can widen. The specific impact depends on your income level and family composition. It's also worth factoring in that individual income tax is progressive, with the rate rising as income grows, whereas the corporate tax rate moves relatively little as income rises or falls.
Benchmarks for Considering Incorporation
Generally speaking, once real estate income exceeds a certain level, there are situations where the corporate tax rate ends up lower than the individual income tax rate, and it's said that incorporating can reduce the tax burden. That said, exactly what level makes it advantageous depends on individual circumstances — whether you have other income, your expense situation, and so on — so there's no uniform benchmark. Unlike an individual, whose tax rate is determined by combining real estate income with other income such as salary, a company can calculate real estate income independently, and that's considered one factor in the decision.
Downsides and Points to Watch
Incorporating brings costs and administrative burdens that don't exist under individual ownership — company formation costs, a tax accountant's retainer fee, the obligation to enroll in social insurance, and more. And once you've incorporated, reverting to individual ownership isn't easy either, so careful consideration is needed. Incorporating while your property portfolio is still small can end up making the cost burden outweigh the benefit, so weighing it against the scale of your holdings is essential.
The General Process for Incorporating
The usual way to proceed is to first tell a tax accountant your current income and the scale of your properties and have them run a simulation of what incorporating would look like. From there, you consider things like the form the company will take (setting up a new one versus using an existing company) and how to transfer the properties (a sale, or putting new purchases under the company's name going forward). If you sell a property to the company, you may need to refinance or get consent from your lender, so it's reassuring to check on that at the same time.
Frequently Asked Questions
Does incorporating save on tax for every owner?
Not necessarily. The effect varies depending on income level, the scale of your properties, and whether you have other income, so an individual simulation is needed.
Is there a benchmark for when to consider incorporating?
It's often considered once real estate income has grown past a certain scale, but there's no clear-cut standard. We'd recommend consulting a tax accountant and deciding based on an actual calculation.
Does incorporating also help with inheritance planning?
There are inheritance planning approaches that make use of a company, but whether they suit you depends on your property situation and the makeup of your heirs. If you're thinking ahead to inheritance, we'd recommend consulting a tax accountant or other professional early.
Summary
Incorporating your rental business widens your tax options, but it also comes with costs such as formation fees and administrative burden. Since the effect varies with income level and the scale of your properties, it's important to consult a tax accountant and judge carefully based on an actual simulation. There's no need to rush to a conclusion — we'd recommend taking your time and considering it based on a multi-year projection.