Move the Building, Not the Land — and Put a Trust on Top

"The rent arrives on time every year. But when I look at what actually reaches me, close to half of it has gone somewhere. And the building will be taxed all over again when it passes to my children." We hear this constantly from clients holding several income-producing properties in their own name.

This is not a question of how well the portfolio is run. It is a question of structure — whose name holds the asset, what gets moved, and what deliberately does not.

Why Rental Income Held Personally Is Taxed Heavily

Income from letting real property is fudōsan shotoku — real estate income — under Article 26(1) of the Income Tax Act. Except where it constitutes business income or capital gains, letting income falls into this category and is aggregated with other income under comprehensive taxation.

The rate applied to that aggregated taxable income comes from the table in Article 89(1) of the Income Tax Act: 45% on the portion above ¥40 million. Local inhabitant tax is added on top. Article 35(1) of the Local Tax Act sets the standard rate of the prefectural income levy at 4%, and Article 314-3(1) sets the municipal income levy at 6% — 10% combined. For someone in the top bracket, the marginal rate is therefore roughly 55% between national and local tax, with the special reconstruction income tax charged separately at 2.1% of the base income tax amount.

A corporation, by contrast, is taxed on each business year's income at a basic rate of 23.2% under Article 66(1) of the Corporation Tax Act. Local corporate taxes and enterprise tax sit on top of that, so a company's actual burden exceeds the headline figure — but the architecture of the rate itself differs from a progressive individual scale.

What matters is that this is not a "how much can I save" question. The same rent, attributed to a different taxpayer, meets a different rate table. Everything beyond that depends on the particular facts.

Move the Building; Leave the Land Where It Is

Where a property-management company is set up, a structure frequently considered is to transfer only the building into the company and leave the land in the individual's name.

The reason is that the transfer itself costs money. Real property acquisition tax is imposed on the acquirer in respect of the acquisition of real property under Article 73-2(1) of the Local Tax Act. Land and buildings are both "real property," so every asset moved carries its own acquisition-side cost. A transfer from an individual to a company is also a disposal for capital gains purposes, and registration carries its own expense. Confining the transfer to the building keeps all of this away from the land.

There is a second consideration: leaving the land in the individual's hands means the individual-side treatment of that land — including how it is valued on succession and which reliefs might be available — is not disturbed. Which reliefs actually apply turns on their own conditions and cannot be asserted in the abstract. But the structural point is worth holding onto: not moving something is itself a design choice.

"Just Transfer It at Book Value" Does Not Work

The transfer price is where this structure is most often misunderstood. You will hear that moving the building at its depreciated book value produces no gain and therefore no tax. The statute says otherwise.

Take the company's side first. Article 22(2) of the Corporation Tax Act defines the amount to be included in gross revenue as revenue from "the sale of assets, the transfer of assets for consideration or without consideration, the provision of services, the acquisition of assets without consideration, and other transactions other than capital transactions." Because acquisition without consideration is written into the text, receiving an asset cheaply is itself captured as revenue at the company level.

The individual's side is more direct still. Article 59(1)(ii) of the Income Tax Act provides that where there is a transfer "for consideration at a markedly low value as specified by Cabinet Order (limited to transfers to a corporation)," the asset is deemed to have been transferred at its value at that time. Article 169 of the Income Tax Act Enforcement Order fixes that Cabinet Order threshold at less than one-half of the value at the time of transfer. Move a building to your company below half of fair value and the capital gain is computed on fair value regardless of what actually changed hands.

Article 157(1) of the Income Tax Act adds a further layer: where an act or calculation of a family corporation is found to unreasonably reduce the income tax burden of a resident shareholder, the district director may compute that resident's income without regard to that act or calculation. Transactions between an owner and their own company sit squarely within its reach.

The conclusion is that the building's transfer price has to be built on fair value — and setting that price is, in practice, the centre of gravity of the whole structure.

Where a Trust Comes In

If incorporation decides which taxpayer bears the annual charge, a trust decides who benefits across generations. Settling the shares of the property-management company into trust makes the succession of those shares itself a design object.

Article 91 of the Trust Act provides a special rule for trusts containing a provision under which a beneficiary's interest is extinguished on their death and a new interest is acquired by another person. But the same article sets the limit: where a beneficiary in existence after 30 years have elapsed from the creation of the trust acquires an interest under that provision, the provision is effective only until that beneficiary dies or that interest is extinguished. This is not a mechanism for perpetual succession — past the 30-year mark, the statute allows one further beneficiary and no more.

Asset separation deserves the same precision. Article 23(1) of the Trust Act provides that, except on the basis of a claim relating to an obligation covered by the trust property, no compulsory execution, provisional seizure, provisional disposition, enforcement of a security interest, auction, or national tax delinquency procedure may be carried out against property belonging to the trust. But Article 23(2) provides that where a trust is created by self-declaration (the method in Article 3(iii)) and the settlor did so knowing it would harm their creditors, holders of claims arising before the trust may also execute against the trust property — and Article 23(4) confines that exception to two years from the creation of the trust. A trust is not a universal shield against debt; when and how it was created changes the answer.

What to Confirm

• Where does the rental income currently sit on the table in Article 89(1) of the Income Tax Act? That determines how much changing the holding name is actually worth.
• What is the building's fair value? Measured against Article 59(1)(ii) and Article 169 of the Enforcement Order, that determines whether a given transfer price stands up.
• Is it the property itself you want to pass on, or the shares in the company that holds it? The answer changes which layer the trust sits on.
• Where do existing borrowings and guarantees sit? Under the exceptions in Article 23 of the Trust Act, that changes the timing and method of settlement.

Mapping the holding name, the transfer price, and the sequence of succession onto a single structural diagram is where design begins for anyone whose core asset is real property.

This article provides general information on tax systems and does not constitute individual tax consultation. Specific filings and tax computations are handled by licensed partner tax accountants whom we introduce.