What is Real Estate Depreciation? How to calculate and real case examples

When you gain income from selling a property, you will need to file for income tax on capital gain on transfer tax. It is best to utilize real estate depreciation for tax saving measures. Some depreciation calculations may be complicated. Here we will introduce depreciation calculations and real case examples.

Real estate depreciation when selling a property

When selling a property, you can calculate depreciation expense based on statutory useful life of a property. Property depreciation is filing expenses, in certain number of years, that cost acquiring a property in each tax filing.

Income tax is tax imposed for property income obtained from January 1st through December 31st. If you do not file tax, additional tax will be imposed for not filing. Make sure you file your tax each year. The penalty for not filing tax is 15% for less then 500,000 yen and 20% for over 500,000 yen.

Income tax is imposed on capital gain on transfer; however, a sold amount does not automatically become an amount for capital gain on transfer. Capital gain on transfer is a total sum of capital gain after subtracting cost from acquiring to selling property and various deductions that are applied. Remember to have the necessary information to calculate capital gain on transfer and depreciation expense.

Calculating the depreciation expense provides you the actual amount of income tax.

How to calculate real estate depreciation expense

Let’s check calculation for real estate depreciation expense when selling a property.

Information necessary for calculation

Method for calculating depreciation expense is as the following:

Acquisition Cost x Depreciation rate

The necessary information needed for the above calculation are building acquisition cost, building and land ratio, useful life of a building, and depreciation rate.

Building Acquisition Cost

Building acquisition cost is expense obtaining a building. Please note, this excludes the cost of obtaining a land. Land, contrarily from building, does not deteriorate thus isn’t considered as depreciation.

Building and Land Ratio

To obtain the exact building acquisition cost, its crucial to know the accurate purchased amount for building and land. There are indications of land and building price on the sales contract or purchase paperwork. In some cases, there may not be any indications, pleas contact your real estate agent in such case.

Useful life of a building

The lawful useful life of a building is made public by the National Tax Agency (NTA). Please check the statutory useful life in order to calculate the useful life of a building for a property.

House (residence built with wood, synthetic resin) 22 years
Used House (overdue of statutory useful life. Residence built with wood, synthetic resin) 4 years
Condominium (Residence built with reinforced steel concrete, steel concreate) 47 years
Wood build (wooden mortared framed) 20 years

The useful life of a building varies depending on how it was constructed, as shown above.

Depreciation rate

Depreciation rate is the proportion of expense able to expense on your obtained price. Depreciation years depends on the statutory useful life of a building. Please check NTA for amount of depreciation rate.

Calculation Examples

Example: 10-year-old steel concrete build residence house (with land). Price 100 million yen

Check the statutory useful life of the building through NTA. In this case, the useful life is 47 years.
Calculate useful life of a building based on the age of a building. If the building is used, include the used age in the calculation. For a 10-year-old building with 47 years of useful life, the calculation for this is:
(Useful life of the building – Used age) + used age x 20%
Steel concreate 47 years of useful life – used for 10 years + used for 10 years x 20% = 39 years
From the calculation, the useful life of the building for this example is 39 years.
Calculate the depreciation from the life of the building
According to NTA, the depreciation for a 39-year-old useful life of a building is 0.026.
Separate land and building
For this example, with land and building purchase, we need to separate the land and building. The land price was 30 million yen, building 70 million yen according to the sales contract.
70 million yen x 0.026 = 1.82 million yen

Thus 1.82 million yen is the depreciation expense able to be calculate each year

Summary

Calculate capital gain from selling a property, determine your income tax and residency tax. Add the depreciation expense for filing tax yearly. If you forget to add depreciation expense, you may lose money on tax.