Quick background, contemplating a move that will generate yearly income in the range of JPY50-70m as an employee, looking for ways to legally optimise tax liability
I took a look at the tax calculator and seems like the general income applicable for income tax deduction is about 3-5m a year, so looking to reduce another 24m
I read one way is to acquire old investment properties that are under accelerated depreciation to offset the salary income, my questions are as of follow
- what is the investment amount to get 24m in depreciation each year for 4 years? I read that buildings in Tokyo have building vs land ratio of 50/50 – 70/30? so 170-200m in total value?
- what is the LTV and rates for 1. whole building (office, hotel, car park?) worth the above amount, 2. a portfolio of residential investment properties (abnb?) Are properties under accelerated depreciation even able to generate income to be self sufficient for mortgage + interests and fees?
- my understanding is that the gain on this is 20% (40~45% tax bucket – 22% cap gain after 5 years) on the deferred portion of the income, assuming the properties were sold at par. And the risks are 1. loss in value of the properties, 2. tax law changes, opportunity costs of the equity for these properties
- if not for this route, does it make sense to setup own business entity and do business with my employer this way instead (not even sure if this will be accepted tbh)
thank you very much for taking the time to read and appreciate any advice.
ps. I already anticipated the backlash just from browsing this subreddit but i really do hope more people get the proper education and have a clear understanding on what is tax evasion, none of the above is tax evasion, if I go through this route you can report me to tax authority and nothing will happen.
by mike83838
11 comments
Are you going to take your money to your next life?
50-70M is top 1%. Life has been good to you so be good back and pay your taxes. This attempt to evade paying tax is leading you to consider time burning and likely poor investments which will leave you worse off both ethically and financially.
Sorry, why not just pay your taxes instead of playing games trying to evade them?
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This is a fun topic and quite common. Since you are not aiming for capital or income gain you are the dream customer for both real estate agents and scammers. My suggestion to you would be to only do real estate if you intend to treat it as a business.
Generating depreciation is a viable plan, and quite common for salary earners at your scale. You need to decide the approach. Do you buy property past its tax life which you can depreciate over 4 years. Or do you buy nicer newer stuff?
The common path at your salary is to buy large and new. This will be easiest to get bank financing for. The thing is: good real estate properties will generate enough cashflow to pay their loan + costs. This usually means you will be making a profit.
To be honest: you should talk with your local bank. The bank will introduce you to safer schemes. There are a ton of predatory schemes and overpriced properties targeting potential buyers who’s eyes are distracted by the tax depreciation.
>what is the investment amount to get 24m in depreciation each year for 4 years? I read that buildings in Tokyo have building vs land ratio of 50/50 – 70/30? so 170-200m in total value?
really depends on the type of building, size and location. Land can very well be more valuable than the building itself.
>what is the LTV and rates for 1. whole building (office, hotel, car park?) worth the above amount, 2. a portfolio of residential investment properties (abnb?) Are properties under accelerated depreciation even able to generate income to be self sufficient for mortgage + interests and fees?
Again it’s a bit too vague, it really depends on location, relationship with bank and your own finance and tax track record in japan. “abnb” you mean airbnb? that’s a tricky business in Japan, short term rental are strictly regulated and have limitations, many people instead get a hotel license so they can have business thorough the whole year for a better return. Consider that having short-term rentals or hotel license means a much larger management headcount, admin and costs. Long-term rentals are way more stress-free, with no or few extra costs and very small management team needs, but in Tokyo nowadays they are not very profitable, and the main reason that wealthy individuals like yourself purchase real-estate is for “just” for tax depreciations. That said, in the right place and with the right contacts, there are some chances of actually making some profit. Without the right contacts and in Tokyo, big real estate companies will probably provide you those 3% to 5% ROI buildings with loads of management costs that won’t actually make you any money, but will still help with tax deductions.
>if not for this route, does it make sense to setup own business entity and do business with my employer this way instead (not even sure if this will be accepted tbh)
That opens a whole new can with many many considerations to make to optimize your company finances.
The most stress-free solution is really to do long-term rental with few trusted partners ( real estate agent, management company, tax accountant and admin). If you want to be a bit more hands-on, you could diversify and have a larger portfolio of properties in different areas with possibly higher returns; otherwise just focus on very few high-quality buildings and let it run!
You can get depreciation but how will you get out of the property one-day above water is the other issue
Basically for you to benefit from 4 years depreciation, the property has to be old wooden house/ apartment with most of the property values on the building rather than land. Hotel/ car park? Forget it. Those will be steel structure (40 yrs depreciation life) or mostly land (no depreciation).
You can’t easily get these in central Tokyo, as most of the value of properties in Tokyo will be in the land.
If you buy these investment properties in rural areas of Japan, you may benefit short term, but you stand to lose even more when you try to resell them. There is a reason why US residential investment were very popular amongst high earnings people in Japan, till they closed that loophole a few years ago.
Unrealistic.
Too good to be true schemes are almost always that – too good to be true. I ran the numbers when a friend asked and the only way it comes out on top is if you can resell a creaky old building on an undesirable plot of land at par. If you fail that, the property taxes will eat you alive for the rest of your life.
At this range – you’re much better off setting up a business for tax planning. I’m going to guess if you’re worth this much then your employer will be much more flexible with the employment terms. Have that discussion first then go from there.
I have just worked with a client that acquired an entire apartment building in Nakano for a similar purpose.
Maybe we can help you if you are interested.
Looked into this but even for a solid RC building in Tokyo that will retain its value you’ll need to put down 30% equity (unless you’re a Japanese citizen or PR), which to me negates the point when that money could be earning a better return elsewhere. You will likely be able to neutralize the income from the property so its tax free, but there would not be enough additional depreciation from this scheme to offset your salary.
For an old wooden building, which is where you get the turbocharged depreciation benefit, it’ll be 100% equity.
In short doesn’t seem worth the effort just for tax offset. Maybe if you have a long term plan to build a portfolio as a business, which you could then refinance at 90-100% LTV once you get PR.
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