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Ticking the right tax boxes

by Philip Brasor and Masako Tsubuku

In most places around the world, property taxes, which are levied on buildings and land, are administered and collected by local governments for the benefit of those governments. This is also true in Japan, but it’s useful to keep in mind that property tax rules and regulations are determined by the central government.

Individual localities may differ in the way they assess property values or collect taxes, but the principles governing property taxes are uniform throughout the country, and the first thing potential homeowners need to understand is that the assessed value of a property for tax purposes has little to do with the price you paid for it or even the retail market value.

In April we received the first tax bill for our land, which we purchased last summer. In Japan, the main criterion for assessing land is its proximity to roads, in particular main arteries and railway stations. In principle, residential land (takuchi) is supposed to be checked and reassessed every year, but that is logistically impossible, given the sheer number of plots throughout Japan, so most municipalities carry out assessments once every three years, which means the landowner pays the same tax for three years after an assessment, unless a significant change takes place with regard to the property in the meantime. For instance, overall land values in our city went down last year, so the local government has readjusted all land taxes accordingly, across the board, for the next two years without making new individual assessments.

The fixed-asset tax (koteishisanzei) on the land itself turned out to be much lower than we had expected. We heard that tax is applied to one third of the assessed value of land if the plot is more than 200 sq. meters, and applied to one sixth of the value for anything smaller. Since our land is 220 sq. meters, we assumed we would pay the higher rate, but as it turns out, the one-third adjustment doesn’t apply to all the land if the plot is more than 200 sq. meters. It is only applied to that portion above 200 sq. meters. The tax itself is 1.4 percent of the adjusted assessed value. Housing land in so-called urban zones also pay toshikeikakuzei, a “municipal tax” that is meant to pay for city services, such as fire departments and ambulances. Our property is outside the city zone, so instead we pay a tax for chōsei kuiki, or “zone under adjustment,” an area that is in a kind of administrative limbo between city and country. In any case, the levy is only a fraction of what the municipal tax would be. In the end, our land tax for the last five months of 2013 amounted to only ¥9,100.

Taxes on both land and structures for a given year are paid the following April, but only if the owner has taken possession by Jan. 1 of the following year. We didn’t take possession until after January, so while we received a tax bill for our land, we didn’t receive one for the house.

In April, we received a notice in the mail regarding the assessment of the house for tax purposes. Two options were offered. One was an on-site inspection (genchi chōsa) and the other was an office inspection that required us to send documents related to the construction of the house to the local government. This latter option is offered to families who work full-time, since officials will only perform on-site inspections during regular business hours.

We chose on-site, which required us to produce the same documents that would be sent in for the office inspection: construction plans, permits to carry out construction, and post-construction inspection certificates. Though we were told three people would carry out the inspection, only two men showed up at the appointed time. One went through all the documents, making notes on a form, while the other walked around the house and the property with a clipboard checking off boxes on a different form.

They were finished in about 15 minutes, probably because our house is small. Though neither man explained in detail what he was looking for, through casual conversation we formed the impression that overall size and quality were less relevant to the assessment than complexity of construction — the number of walls and doors. Relatively speaking, our house, which is basically a box, has a minimum of both, which seemed to surprise the official doing the visual inspection.

Afterward, the two men explained how our tax would be calculated. Because our house was brand new, we automatically saved money, since there was a special deduction that would cut our tax in half after it was determined. This deduction is part of the government’s scheme to promote new housing construction, but it only lasts for three years (for condominiums it’s five years). The official was careful to point out that we should expect our tax bill to go up significantly in our fourth year.

As a matter of fact, a neighbor of ours had just told us that her tax bill had gone up considerably, and she built her house four years ago. However, residential structures in Japan lose their value quickly — depreciation on single-family homes for tax purposes is 22 years — so by the time the next assessment is made, our house may very well have lost up to a third of its value, at least in market terms.

There is also a one-time real estate tax (fudōsan shutokuzei) that is paid to the prefecture, in our case, Chiba. But the official implied that we would probably be exempt, since the value of our land is so small that the automatic deduction (¥45,000) would wipe it out. But we won’t know until April.

The two officials wouldn’t tell us what they thought our bill would be, and one actually laughed when we asked, presumably because he didn’t think it would be big enough to worry about. But based on what we had learned about neighbors’ property tax levies, and comparing the size and quality of our house with theirs, we think it will be less than ¥100,000. Of course, if you’re buying an already built house all you have to do is ask the previous owner or real estate agent what the property tax is. In the past, however, we’ve found that the latter often doesn’t know or won’t tell.

Again, keep in mind that our house is small, located in a “nonurban” zone and conspicuously free of value-added, but common, accoutrements, like a garage or even a balcony. Consequently, the assessment will be lower. And since it is new, we get a large deduction. Houses with special “eco” features or designated as “long-lasting” (chōki) are also subject to substantial deductions. These conditions do not necessarily apply to condominiums, which incorporate steel frames and therefore are assessed at higher rates, but condos also have relatively higher resale values compared to houses, for what that’s worth.

Philip Brasor and Masako Tsubuku blog about Japanese housing at catforehead.wordpress.com.