What does the concept of 'depreciation' for real estate (especially buildings) in Japan mean for property value?

Created At: 8/11/2025Updated At: 8/16/2025
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Talking About "Depreciation" in Japanese Real Estate: Why Do Properties Lose Value as They Age?

Hey there. If you're thinking about buying property in Japan, you definitely can't avoid the term "depreciation." Many people get overwhelmed hearing it, thinking the property just loses value constantly after purchase, like a car. Don't worry, it's not that scary. Once you understand the logic, you might even be able to use it to your advantage.

Let's use an analogy:

Imagine you buy a top-of-the-line Apple computer. Fresh out of the box, it's worth ¥10,000. But after 5 years of use, even if it still works, if you try to sell it, it might only fetch ¥2,000. That missing ¥8,000? That's "depreciation."

Japanese properties, especially the building itself, are just like that computer.

Core Concept: Land and Building Are Two Different Things

In Japan, a property's value is typically broken down into two parts:

  1. Land: This does not depreciate. It's like aged Maotai liquor. As long as the location is good (e.g., along the Yamanote Line in Tokyo), its value can potentially increase with urban development. Land is "permanent."
  2. Building: This is the part that "depreciates." Wood ages, equipment becomes outdated, design styles fall out of fashion. So, from a legal and tax perspective, a building has a "useful life," and its value decreases over time.

Therefore, when we talk about "depreciation" in Japanese real estate, we are mainly talking about the decrease in the building's value, not the entire property.

What Exactly is "Depreciation"?

Depreciation manifests mainly on two levels:

1. A "Bookkeeping Tool" for Taxes (The Most Important Impact!)

This is the core purpose of the depreciation concept. For property investors, depreciation is practically a tax-saving magic trick.

How does it work?

Suppose you buy a property in Japan for rental income, earning ¥1 million in rent per year. According to regulations, your building can be "depreciated" by ¥300,000 annually. Then, when calculating how much tax you owe, your "taxable income" isn't ¥1 million, but ¥1 million - ¥300,000 = ¥700,000.

You only pay taxes on ¥700,000 of income!

See? Depreciation here is a legitimate accounting method. It allows you to deduct a portion of "virtual" costs from your income, thereby reducing your tax burden. For landlords earning rental income, depreciation is your good friend.

2. Physical "Wear and Tear"

This is easy to understand. After living in a house for twenty or thirty years, the kitchen and bathroom fixtures are definitely worn, wallpaper might need replacing, and the wooden structure might require maintenance. Japan is also an earthquake-prone country, so people are very sensitive to a building's "age" and "earthquake resistance standards." Therefore, there is a real difference in living experience and safety between a brand-new building and an "older" one.

Statutory Useful Life: An "Official" Lifespan Reference

Japanese tax law assigns a "Statutory Useful Life" to buildings of different structures. After this period, for tax calculation purposes, its value approaches zero.

  • Wooden (Wood): 22 years
  • Steel Frame (Steel Frame): 19-34 years (depending on steel thickness)
  • Reinforced Concrete (RC) / Steel Reinforced Concrete (SRC): 47 years

Please Note! This is purely a tax and accounting concept! A 47-year-old reinforced concrete apartment building absolutely does not mean it's collapsing or uninhabitable. Many well-maintained apartments are commonly lived in for 60, 70 years, or even longer.

The Specific Impact of Depreciation on "Property Value": Book Value vs. Market Value

This is the crucial point. We need to distinguish between two types of "value":

  • Book Value: This is the value in the eyes of banks and tax authorities. It's calculated strictly based on the "Statutory Useful Life." For example, a 22-year-old wooden house might have a "book value" of zero. Banks place great emphasis on this when granting loans. This is also why it's difficult to get loans for old houses, and loan amounts are often low.

  • Market Value: This is what you can actually sell it for. The market doesn't completely follow the tax authority's rules. A 25-year-old wooden house might have a "book" building value of zero, but if it's in an excellent location in central Tokyo and well-maintained, its selling price will be primarily determined by the land value, which can still be very high. The buyer is essentially purchasing the land and the right to live on it.

Simply put:

  • In prime urban areas, the land makes up the bulk of the property value, so the impact of building depreciation is relatively smaller. The phrase "location, location, location" is vividly true in Japan.
  • In rural or remote areas, the land itself has little value, so the property value depends mainly on the building. Here, depreciation has a huge impact, and an old house might indeed become hard to sell at a good price.

So, What Does This Mean for Us Ordinary Buyers?

  1. If you are an investor:

    • Consider buying "older" properties in good locations. Because the building depreciates quickly, it can help offset a lot of tax on your rental income. This is especially advantageous for wooden houses, which depreciate fully in 22 years. You profit from stable rental cash flow and the long-term value of the land.
  2. If you are a buyer for owner-occupation:

    • Don't be scared off by "building age." Focus on location, management condition, and the actual state of the property. A 30-year-old RC apartment, if well-maintained and renovated, might offer a better living experience than a new apartment in a poor location.
    • When buying a used property, understand that you are primarily buying "land value + remaining building value." For very old houses, you can basically think of it as buying the land.
  3. If you are a seller:

    • Accept the reality that building value decreases over time. The price you ultimately get for your property depends heavily on your land value and the maintenance condition of the building.

To Summarize

Don't be intimidated by the word "depreciation." It's more like a set of rules than a death sentence for your property.

  • For investors, it's a tax-saving tool.
  • For owner-occupiers, it reminds you to focus more on land value and the actual condition of the property.

When buying property in Japan, you're not just buying a "shell"; you're buying the land it sits on. As long as you choose the right location, even if the building becomes "worthless" on paper, the value of your asset still has solid backing.

Created At: 08-11 12:41:01Updated At: 08-12 02:49:39