Effective 1 January 2021, taxpayers in Japan will not be allowed to offset losses generating from the rental of overseas 'second-hand' real estate against other income.
If an individual has a loss from the rental of second-hand overseas real estate using method one, two or three below to calculate depreciation expense, the portion of the loss corresponding to the depreciation expense will be disallowed and cannot be offset against income from other sources.
This change will effectively close the tax saving opportunity that remained available to international assignees and foreign nationals in Japan leasing their apartment or house in their home country or other countries during assignment or residency in Japan.
- For assets that have lapsed all of their statutory useful lives, a method in which the useful life is equal to 20% of their statutory useful lives
- For assets that have lapsed a portion of their statutory useful lives, a method in which the useful life is calculated as a sum of (i) the statutory useful life of the asset less elapsed years and (ii) 20% of the elapsed years
- A method in which years of useful period after the property has been placed in service is used as the useful life. An exception is allowed for method 3.
Under method 3, if the taxpayer attaches documents to evidence that the useful life of the overseas second-hand real property in accordance with laws and regulations of the jurisdiction where the overseas second-hand real property is located is used or otherwise evidences that the years of useful period is appropriate, depreciation expense will be allowed.
If a taxpayer subject to the limitation of depreciation expense on overseas second-hand real property later sells that real property, the limited depreciation expense shall not be deducted in calculating the cost basis of that real property for purposes of calculating capital gain. It will generally result in reducing the capital gain.
Please note that detailed application may change depending on further legislations.
Get in touch
If you would like to discuss the full implications of these changes, please contact Tosh Kamii, Grant Thornton Japan