1. How is this done?
   You buy a property overseas and then rent it out. As long as the property is over a certain age, you can depreciate the value of the building against your Japanese income tax, thereby reducing your Japanese tax bill.


2. Who can benefit from this?
   Any Japanese national or non-Japanese national who is resident for over 5 years (out of the last 10 years) for tax purposes.


3. How old must the property be to qualify?
   This depends upon what it is made of. There are lots of different categories, but the most important categories are:
   • Wood: over 22 years
   • Brick: over 38 years
   • Concrete: over 47 years


4. Over how many years does the value of the property depreciate?
   Again, it depends upon what it is made of:
   • Wood: 4 years
   • Brick: 7 years
   • Concrete: 9 years


5. Can I depreciate the entire value of the property?
   No, just the value of the building. When you buy the property you ask the appraiser to give an opinion as to the split between the value of the land and value of the building. The Japanese tax authorities will accept a maximum of 80% (building) and 20% (land).


6. Can you explain how this works?
   Let's assume that you have a high yen income and that you buy a 25 year-old wooden house in California for $1 million. Your appraiser values the land at $200,000 and the building at $800,000. For 4 years, you can claim depreciation in Japan of $200,000 per year, which will reduce your taxable yen income substantially. Also, other calculations based on your taxable income in Japan will be reduced in the following year, like City tax, Health, Social Security & Childcare options.


7. Can you give a simple example of how 6 works then?
   Let's assume you are earning over 50 million yen in Japan & you bought the $1 million house. Let's also assume that Rent minus Expenses = zero. It should be noted that the tax calculation process is a little more complicated than exemplified below: 50 million yen would mean that your tax is calculated @45% = 22.5 million yen (This is the annual tax amount which would be withheld from your monthly salary). Assuming that 1USD = 100 yen, depreciation of $200,000 per year would amount to 20 million yen. This would reduce your taxable income from 50 million to 30 million yen (50 minus 20), and mean that your tax is calculated @40% = 12 million yen. But you paid 22.5 million yen in taxes, and your taxable income has been calculated to be only 12 million yen. Therefore, you would get a refund of 22.5 minus 12 = 10.5 million yen.


8. Can Japanese nationals do this? If so, isn't it costing the Japanese government a fortune?
   Japanese nationals can claim the depreciation, but if they sell the property or they die, the property is valued at that point in time. If the market value is above the depreciated value (which it almost always is), there is a payment back to the Japanese government. Japanese can offset the recapture tax by buying more property or by using other strategies to create losses to offset taxes.


9. So how does it work especially well for non-Japanese nationals?
   At some point in time, most non-Japanese nationals may want to or have to leave Japan for good and thereby escape the Japanese tax net because they are no longer resident in Japan. So the tax relief is claimed while they are resident in Japan, but the tax relief does not have to be paid back once they have left Japan. Furthermore, at this juncture the exit tax, which is to be imposed in 2020, does not cover assets like Real Estate. There are 3 key points for non-Japanese nationals who do this: (a) don't buy a property in Japan since it will always be within the Japanese tax net even if you leave Japan (b) don't sell your overseas property while you are still resident in Japan, and (c) don't die while you are still resident in Japan.


10. At what point does the depreciation start?
    Let's assume that you buy a property on March 1, you advertise the property for rental on April 1, and a tenant moves in on May 1. The depreciation starts on April 1. Since the Japanese tax year runs from January 1 to December 31, you will qualify for 9 months' depreciation in Year 1 (i.e. from April 1 to December 31).


11. So what do I need to do?
    Engage ISG to:
    • Locate the property
    • Provide pre-underwriting financial analysis
    • Arrange a mortgage
    • Set up a US bank account if required
    • Provide real estate advice to ensure the best terms
    • Provide efficient Japanese tax filing to ensure the maximum tax reduction
    • Provide US and California State tax filing services
    • Provide property management services
    • Offer other wealth-building services to protect your investment and your family's long-term benefits

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