When renting out your property in Japan, in addition to the taxes and fees we have seen in our previous article “Taxes and fees you need to pay while holding a property in Japan”, there is a tax imposed on rental income.
Tax on rental income - Income tax
The tax is imposed only when you get rental income from the property you rent out. The rental income becomes part of your taxable income in Japan and subject to income tax.
How you pay the tax differs depending on whether you are a resident of Japan or not.
(1) If you reside in Japan: Income tax return filing
[Formula]
Income tax = (Total taxable income – deductions) x income tax rate(*) – tax credit
➟ Who pays it?
You will be responsible for the payment. Your rental income will be added to your income from employment and other sources (total taxable income) and the income tax is calculated based on the total taxable income.
➟ When to pay?
You are required to file your income tax return and pay the total income tax for the year (from January 1st to December 31st) within the period from February 16th to March 13th of the following year.
➟ How is the tax rate determined?
Depending on the amount of your total taxable income, the tax rate to be applied (5% to 45%) and the tax credit available vary.
➟ How do I calculate my rental income?
The amount of your rental income for tax purpose is calculated by deducting necessary expenses from the gross rental income. The necessary expenses here include taxes when purchasing the property (such as Registration and License Tax and Real Estate Acquisition Tax) and holding the property (such as Fixed Asset Tax, City Planning Tax), insurance premiums, depreciation expenses, repair costs, etc.
(2) If you reside overseas: 20.42% withholding tax + final tax return filing
➟ Who pays it?
If you are a non-resident of Japan, the rental income from your property located in Japan will be subject to a withholding tax of 20.42%. But in this case, the tenant, whether being an individual or a corporation, has the obligation to withhold and pay the tax amount from the rents before paying the rest to you.
➟ When to pay?
The tenant pays the tax by the 10th day in the following month of the rent payment.
➟ Is there any exception?
If the tenant is an individual and rents your property for himself/herself or his/her relatives to live in, no withholding tax will be imposed.
When you submit the final tax return, your withholding tax amount will be settled so that the final tax amount becomes equal to what you would have paid if you lived in Japan.
If you are a non-resident of Japan, you will need to appoint a “Tax Agent” who is a resident of Japan and can file the final tax return on your behalf. Once you have a Tax Agent, you are required to notify the local tax office that has jurisdiction over the property by submitting a form called “Notification of Tax Agent”.