Japan national government proposes new inheritance tax method for valuing real estate

On November 26th, the Nikkei Shimbun reported on proposed changes to how Japan values real estate for inheritance-tax purposes would shift assessments away from traditional indicators such as the National Tax Agency’s annually published rosenka (roadside land prices) and instead base valuations on the property’s original purchase price.

Photo by Scott Graham on Unsplash. 

The national government aims to close perceived loopholes that allow heirs to sharply discount property values and significantly reduce their inheritance tax burden.

Under the draft rules, the valuation would begin with the price paid by the deceased and adjust it for subsequent movements in land prices. The assessed amount would then be set roughly 20% below that adjusted figure.

Compared with the existing rosenka-based method, the revised approach is expected to raise taxable values and increase inheritance-tax revenue.

Rental apartments and similar income-producing properties typically become more valuable when they generate higher rents and maintain higher occupancy. But for inheritance-tax purposes, properties with many tenants are treated as having more usage restrictions, leading to valuations well below market prices.

This gap has made it more tax-efficient to inherit real estate rather than cash, encouraging purchases motivated primarily by tax savings. The proposed rule changes seek to curb such strategies and improve perceived fairness according to the proposal.

The proposal also targets fractional-ownership real estate products, in which multiple investors jointly purchase rental apartments or office buildings and share the rental income.

According to the proposal, fractional-ownership products, sold by real estate companies and financial institutions, have also been used to reduce inheritance tax.

Under the proposed approach, fractional interests would be valued using current market transaction data - the prices at which comparable stakes are trading - regardless of when the investment was originally acquired.

This method replaces rosenka-based assessments that often undervalue such products by ignoring rental income, building value, and real market demand, making tax valuations more aligned with true economic value, says the proposal.

The National Tax Agency has already taken steps to address abuses involving high-end condominium towers, introducing corrective measures in FY2024 to rein in so-called tower-mansion tax shelters. (linked article from 2016 but explains what this issue was well).

However, tax-saving strategies using rental properties and fractional-ownership vehicles have remained a significant loophole.

A case presented by the agency at a November meeting of the government’s Tax Commission illustrated the scale of the issue: a rental apartment building in Tokyo’s Chiyoda Ward purchased for ¥2.1 billion in August 2019 was assessed at only ¥420 million at the time of inheritance in May 2022.

In another example involving fractional-ownership products, a ¥30 million investment was valued at just ¥4.8 million for tax purposes, reducing assessed taxation by more than ¥10 million.

Under Japan’s inheritance-tax law, assets must be valued at market price, and heirs are responsible for calculating and paying the tax owed. Because determining market value for real estate is difficult, authorities have traditionally relied on rosenka and other official indicators.

The proposed reforms would represent the most significant shift in valuation methodology in years, though the measures remain at the draft stage and have not yet been enacted into law.

Source:

Nikkei Shimbun (Japanese only; paywalled)