Property Is Taxed in Three Stages — and the "Five Years" Is Not Counted From Your Purchase Date

"One property in Tokyo, one abroad, both rented out. Which one leaves me better off after tax?" We hear this question repeatedly from clients holding real estate across jurisdictions.

It cannot be answered with a single rate. Real estate is taxed at three separate stages — acquisition, ownership, and disposal — each under a different levy, and jurisdictions differ in where they place the weight. What follows sets out the Japanese structure stage by stage.

Stage One: Acquisition

The standard rate of real property acquisition tax is set at 4/100 by Article 73-15 of the Local Tax Act. The tax base, under Article 73-13 of the same Act, is "the value of the real property at the time of acquisition" — not the purchase price you actually paid.

Time-limited reliefs have been available for acquisitions of housing and land, but these are, by their nature, temporary measures. Whether they apply, and at what level, depends on when the acquisition occurs, so the measure in force at that time has to be confirmed.

Registration and licence tax on the transfer of title, and stamp duty on the contract, arise separately.

Stage Two: Ownership

During ownership, fixed asset tax is imposed every year, and city planning tax may be added depending on where the property is located.

The standard rate of fixed asset tax is 1.4/100 under Article 350 of the Local Tax Act.

City planning tax is different: it is not automatically imposed on all real property. Article 702(1) provides that a municipality "may" impose it on land and buildings situated within an urbanisation promotion area of a city planning area (or, where no area classification has been established, within an area designated by municipal ordinance covering all or part of that city planning area). Whether to levy it is left to the municipality, and the eligible areas are limited. As to rate, Article 702-4 provides that it "may not exceed 0.3/100" — this is not a standard rate but a ceiling.

The tax base, under Article 349(1), is the value entered in the tax register. That "value" is defined by Article 341(v) as "proper current value" — so it is not the purchase price you actually paid.

What matters at this stage is that the burden recurs annually. It accumulates with the holding period, and the cash outflow comes before any gain is realised.

Stage Three: Disposal — and Where the Five Years Start

Where an individual disposes of land or buildings, the resulting income is taxed separately from other income.

• Article 31(1), Act on Special Measures Concerning Taxation: holding period exceeding 5 years as of January 1 of that year → 15/100 of the taxable long-term capital gain
• Article 32(1) of the same Act: holding period of 5 years or less as of January 1 of that year → 30/100 of the taxable short-term capital gain

The income tax rate alone differs by a factor of two. On top of this sits the special income tax for reconstruction (2.1/100 of the base income tax amount, under Article 13 of the Act on Special Measures for Securing Financial Resources for Reconstruction), and local tax is charged separately.

This is where the most common misunderstanding sits. The five years is not five full years counted from the acquisition date. The statute fixes the test date as "January 1 of that year" — meaning January 1 of the year of disposal. And the holding period runs, under Article 31(2), from the day after acquisition.

Take a property acquired on March 1, 2020: the clock starts on March 2. Dispose of it during 2025, and the holding period at the test date of January 1, 2025 is roughly four years and ten months — short-term, even though more than five full years had passed by the time of sale. The long-term category is reached only for disposals on or after January 1, 2026, which in practice means waiting close to five years and ten months from acquisition. A few months' difference in timing translates directly into a difference in rate.

The Reach of the Relief Is Determined by Use

Article 35(1) of the Special Measures Act provides a deduction of ¥30 million from the gain on a disposal of residential property.

What counts as "a disposal of residential property" is set out item by item in Article 35(2). Item (i) covers "a dwelling used as one's residence" and its site. Item (ii) covers the site of a dwelling destroyed by disaster, and also the disposal of a former residence that has ceased to be used as such — provided the disposal occurs by December 31 of the year in which three years elapse from the date it ceased to be so used. Current occupation is therefore not required; a window remains open after moving out, which is easily overlooked. Separately, Article 35(3) treats the disposal of a decedent's former residence acquired by inheritance or bequest as falling within Article 35(1), subject to timing and other conditions.

That said, every one of these provisions starts from a "residential dwelling" — one that was put to residential use. A property let continuously from acquisition and never put to residential use falls under neither item (i) nor item (ii) of Article 35(2). Nor within Article 35(3), whose items require that the property has not been used for business, for leasing, or as a residence between the time of inheritance and the disposal — a condition a continuously let property cannot satisfy.

Article 35(4) further substitutes a deduction of ¥20 million where, in an Article 35(3) case, three or more heirs acquired the dwelling.

The same property and the same gain can fall on either side of this line, decided by the factual question of use.

Treat It as a Structural Question

• Where the weight falls — where ownership is taxed annually, long holding and short turnover swap places in terms of which is favourable
• Holding period measured from January 1 — disposal decisions have to be built around calendar years, not days
• The history of use, together with timing — a property never put to residential use falls outside the relief; but a former residence can still qualify even if it was let after the owner moved out, provided the disposal occurs by December 31 of the year in which three years elapse from the date residence ceased (Article 35(2)(ii)). Use and timing cannot be assessed separately

Different jurisdictions place the burden differently across the three stages. Comparing acquisition rates alone, or disposal rates alone, will not reveal the actual burden across a holding period. Putting holding period, use, and intended disposal timing onto a single structural diagram is where this begins. Time-limited reliefs also change with the period in which they apply, so any plan touching disposal timing needs to be confirmed within the year.

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.