When selling real estate, is the profit subject to Capital Gains Tax? What are the tax rate and calculation method?

Okay, no problem. Let me break down Japan's "Capital Gains Tax" (Jōto Shotoku / 譲渡所得税) on selling property for you, keeping it as straightforward as possible.

Do I need to pay 'Capital Gains Tax' (Jōto Shotoku) on profits from selling property? What are the tax rates and how is it calculated?

Simply put, yes, you pay tax on the profit you make from selling a property. However, it's crucial to understand that this tax is not applied to the total sale price (e.g., you don't pay tax on the full 50 million yen if you sell for that amount). It's only applied to your "profit". This "profit" is called "Jōto Shotoku" (譲渡所得) in Japanese, essentially meaning "profit tax on property sales."

If you sell the property at a loss or calculate no profit, then naturally, you don't owe this tax.

Step 1: Calculate How Much You Actually "Made"

This is the crucial first step. The formula is quite simple:

Profit (Jōto Shotoku) = Sale Price - (Acquisition Cost + Selling Expenses)

Let's break down each component:

Sale Price (Jōto Kakaku / 譲渡価額)
- This is the simplest part: the final price you sold the property for.
Acquisition Cost (Shutokuhi / 取得費)
- This is not just the original purchase price. It includes various costs incurred when you bought the property, such as:
  - Real estate agent fees at purchase
  - Judicial scrivener fees and registration license tax for property registration
  - Real estate acquisition tax
  - Stamp duty on the purchase contract
  - If you bought an older property, renovation or remodeling costs necessary for move-in readiness.
- Therefore, keep all receipts and contracts from the purchase! These are vital proof for reducing your future tax bill.
- What if you can't find the receipts? Tax law accounts for this. You can use "5% of the sale price" as an estimated acquisition cost. However, this percentage is usually low, resulting in a higher calculated profit and thus more tax. So, try your best to find the original documents.
Selling Expenses (Jōto Hiyō / 譲渡費用)
- These are the costs you incurred selling the property, such as:
  - Real estate agent fees for the sale
  - Stamp duty on the sales contract
  - Costs for clearing out the property or demolishing old structures to get a better sale price.
  - (Note: Your own property repair costs or fixed asset taxes are not included here.)

Example: You sell a property for 50 million yen net. You originally bought it for 35 million yen, and with various taxes and fees, the total acquisition cost was 38 million yen. For this sale, you paid 1.5 million yen in agent fees.

Your "Profit" (Jōto Shotoku) is: 50 million - (38 million + 1.5 million) = 10.5 million yen

Next, we calculate the tax based on this 10.5 million yen profit.

Step 2: How Long You Held the Property Makes a Huge Difference in Tax Rate!

Once you have the profit, the next step is determining the tax rate. Japan's property tax rates depend heavily on the holding period, categorized as "Short-term" or "Long-term," with significantly different rates.

Short-term Capital Gains (Tanki Jōto Shotoku / 短期譲渡所得)
- Condition: As of January 1st of the year you sell the property, you have held it for 5 years or less.
- Tax Rate: 39.63% (Income Tax 30% + Resident Tax 9% + Reconstruction Special Income Tax 0.63%)
- This rate is very high, primarily to discourage short-term property speculation.
Long-term Capital Gains (Chōki Jōto Shotoku / 長期譲渡所得)
- Condition: As of January 1st of the year you sell the property, you have held it for more than 5 years.
- Tax Rate: 20.315% (Income Tax 15% + Resident Tax 5% + Reconstruction Special Income Tax 0.315%)
- The rate is effectively halved, which is why most people aim to hold properties for over 5 years before selling.

Important Note! The "5 years" is calculated in a specific way. It's not from the purchase date to the sale date. It's calculated from the date you acquired ownership until January 1st of the year you sell the property. For example: You bought a property on June 1, 2018, and sold it on July 1, 2023. Although the actual holding period exceeds 5 years, for tax purposes, as of January 1, 2023, the holding period is 4 years and 7 months – still considered "Short-term." You must hold it until after January 1, 2024, to qualify for the "Long-term" lower rate. This point is critical and often misunderstood!

Step 3: Don't Worry, There Are Major Benefits! Special National Tax Deductions

Seeing the rates above might seem daunting. Don't worry! Japanese tax law offers very powerful deductions for individuals selling their primary residence (the home you live in, not an investment property). The two most common are:

1. 30 Million Yen Special Deduction (3,000万円の特別控除)

This is the most significant benefit! Simply put, if you sell your primary residence and meet certain basic conditions (e.g., you haven't used this deduction within the past two years, etc.), you can deduct 30 million yen directly from your profit!

Back to our example:
- Your calculated profit is 10.5 million yen.
- Since you sold your primary residence, you qualify for this deduction.
- 10.5 million - 30 million = -19.5 million
- Your taxable profit becomes negative, meaning zero.
- Conclusion: You owe zero yen in tax!

For most people selling their primary residence, the profit doesn't reach 30 million yen, so this deduction effectively makes the sale tax-free.

2. Reduced Tax Rate for Long-Term Holding of Primary Residence (軽減税率の特例)

What if your property is very valuable, and even after the 30 million yen deduction, you still have a profit? If you held this primary residence for over 10 years, there's a further reduction.

Condition: Holding period exceeds 10 years, and it's your primary residence.
Benefit: For the portion of profit remaining after the 30 million yen deduction that is up to 60 million yen, an even lower tax rate applies!
- Tax Rate: 14.21% (Income Tax 10% + Resident Tax 4% + Reconstruction Special Income Tax 0.21%)

This can be used in combination with the 30 million yen deduction.

A Highly Profitable Example: You sell a primary residence held for 12 years, with a total profit of 50 million yen.

First, apply the 30 million yen deduction: 50 million - 30 million = 20 million yen (remaining profit subject to tax).
This remaining 20 million yen qualifies for the reduced rate because you held it over 10 years.
Your tax would be: 20 million × 14.21% = 2.842 million yen.
Without this special reduced rate (using only the standard long-term rate), your tax would be 20 million × 20.315% = 4.063 million yen. That's a saving of over 1.2 million yen!

To Summarize

First, calculate your profit: Sale Price - (Acquisition Cost + Selling Expenses).
Check the holding period: As of January 1st of the sale year; over 5 years means a much lower rate.
Utilize the tax benefits:
- Selling your primary residence? Deduct 30 million yen from profit – most people pay no tax.
- Held it over 10 years and profit remains after the deduction? The remaining portion (up to 60 million yen) gets an even lower rate.
Final reminders:
- Keep all receipts and documents; they are fundamental for reducing your tax.
- Always calculate the holding period accurately before selling – a single day can make a difference of millions in tax.
- If your situation is complex or you're selling an investment property (which doesn't qualify for the primary residence benefits), it's highly recommended to consult a professional tax accountant (Zeirishi / 税理士). Spending a little can help you legally save a lot.

Hope this explanation helps!