How Land vs Building Depreciation Actually Works in Japan

One of the most distinctive features of the Japanese property market — and one that foreign investors most often misread — is the way the tax system treats buildings and land. Buildings depreciate aggressively for tax purposes. Land does not depreciate at all. The split between the two on any acquisition has meaningful implications for hold-period economics and how the property should be underwritten.

The basic principle

When a Japanese property is acquired, the purchase price is allocated between land and building components. The split is typically based on a combination of the contract, the assessed cadastral values, and professional appraisal. The split is binding for tax purposes.

Once allocated, the two components are treated very differently:

• Land — does not depreciate. Carrying value remains at the original land cost (with limited exceptions).
• Building — depreciates on a straight-line basis over a statutory useful life that varies by construction type.

Statutory useful lives by construction type

The statutory useful life for residential buildings depends on the construction:

• Wood — 22 years
• Lightweight steel frame — 27 years
• Heavy steel frame — 34 years
• Reinforced concrete (RC) — 47 years

For an older building, the remaining useful life is calculated based on the building's age at acquisition. A building older than its statutory life is depreciated over a shortened simplified schedule (typically 20% of original useful life, minimum 2 years), which produces very large annual depreciation deductions.

Why this matters for foreign investors

The depreciation deduction reduces taxable rental income, often substantially. For a foreign investor holding a wood-frame residential building, the depreciation deduction alone can offset most or all of the rental income for tax purposes during the early years of the hold. This is a meaningful structural feature of Japanese property economics — and one of the reasons institutional capital has favored older wood-frame residential acquisitions in some segments.

There is no equivalent depreciation regime for land. A property where land represents a high share of value (typical of central urban acquisitions) has less depreciation shield than a property where building represents a high share of value (typical of suburban or older multi-unit acquisitions).

The exit consequence

Aggressive depreciation reduces the tax basis of the building over time. On disposal, the capital gain is calculated against this reduced basis — which means a portion of what looks like rental income shielding during the hold is effectively deferred into the exit gain.

For long holds, the deferral has real value because of time value of money and the lower long-term capital gains rate. For short holds, the recapture effect can erode the benefit. This is exactly the kind of cross-period planning that distinguishes professional from amateur Japanese property investment.

The machiya exception

The depreciation framework explains why most postwar Japanese housing genuinely is a wasting asset — depreciation eats the building value down to near zero. It also explains why the traditional Kyoto machiya defies this pattern. A 150-year-old building that has been structurally restored has both reset its useful life and acquired a cultural premium that overwhelms the depreciation framework. The standard model simply does not apply.

Frequently asked questions