Japan Land vs Building Depreciation: How the Tax Math Actually Works

Japanese real estate is, for tax purposes, two assets bolted together: land (which cannot be depreciated) and building (which can). The allocation between the two at the time of purchase determines the depreciation basis for the entire holding period. Getting the allocation right — or wrong — meaningfully affects after-tax economics.

This piece walks through how the allocation is conventionally made, how aggressive an allocation can defensibly be, and the worked tax math for a representative cross-border investment.

Why the allocation matters

Depreciation deductions reduce Japanese taxable income from the property — rental income, in most cases. The higher the allocation to building, the higher the annual depreciation, the lower the taxable rental income, the lower the annual tax bill.

Over a 10-year hold of a ¥200M Tokyo property, a 60-percent-building allocation versus a 30-percent-building allocation can mean a tax difference of ¥10M to ¥30M for an investor in higher income brackets. The allocation is one of the more consequential decisions made at acquisition.

How allocation is conventionally made

Three methods are commonly used to split purchase price between land and building:

• Government assessed values (固定資産税評価額) — the Japanese tax authority publishes assessed values separately for land and building components annually. The ratio of these two values can be applied to the purchase price to derive the allocation. Conservative and defensible; typically generates building allocations of 25 to 45 percent.
• Construction cost estimation — for the building component, estimating current replacement cost minus age-adjusted depreciation. Tends to produce higher building allocations than the assessed-value method, particularly for newer or higher-spec buildings.
• Purchase contract specification — where the seller agrees to specify the land and building components separately in the sale contract, this allocation is generally accepted by Japanese tax authorities. Most common in newly constructed condominium sales where the developer publishes the allocation in the sales documentation.

Tax authorities have discretion to challenge an aggressive allocation that diverges significantly from the assessed-value method without justification. A buyer claiming 80 percent building allocation on a property where the assessed values support 30 percent should expect scrutiny. A buyer claiming 45 to 60 percent building allocation supported by construction cost analysis is typically in defensible territory.

Useful lives by construction type

Once the building portion is identified, the depreciation rate depends on the statutory useful life for the construction type:

These are 'new building' useful lives. For used buildings, the depreciation period is adjusted via a formula that produces significantly shorter remaining useful life — often dramatically shorter.

Used building depreciation: the accelerated benefit

The formula for used buildings depends on whether the building exceeds its statutory useful life at purchase:

• Building age < statutory life: Remaining useful life = (Statutory life − Age) + (Age × 20%).
• Building age ≥ statutory life: Remaining useful life = Statutory life × 20%, with a minimum of 4 years.

Worked example: a wood-frame house (statutory life 22 years) purchased at 30 years of age. Age exceeds statutory life. Depreciation period = 22 × 20% = 4.4 years, rounded down to 4 years. Annual depreciation = 25 percent of building basis. On a ¥80M building allocation, that is ¥20M per year for 4 years.

Second example: a reinforced concrete condominium (statutory life 47 years) purchased at 30 years of age. Age below statutory life. Depreciation period = (47 − 30) + (30 × 20%) = 17 + 6 = 23 years. Annual depreciation ≈ 4.3 percent of building basis. On a ¥120M building allocation, approximately ¥5.2M per year.

The accelerated treatment of older buildings is the basis for the 'used wooden building' strategy that has been heavily marketed: buy an older wood-frame property, generate dramatic 4-year depreciation, capture significant cross-border tax benefit. The strategy works mathematically but requires careful planning around rental income capacity, eventual sale tax treatment, and home-country tax recognition of the deductions.

Worked cross-border example

A non-resident foreign investor purchases a 30-year-old wood-frame Tokyo investment property for ¥180M (¥80M building, ¥100M land per assessed value allocation). Annual rental income ¥9M gross, ¥7M net of operating expenses excluding depreciation.

The structure generates four years of Japanese tax losses that can be carried forward to offset future income. After year four, the building is fully depreciated and the rental income becomes fully taxable.

Crucially, when the property is eventually sold, the depreciation taken is recaptured — the seller's cost basis is reduced by accumulated depreciation, so the taxable gain at sale is correspondingly higher. The strategy defers tax rather than eliminates it. Whether the deferral is valuable depends on the investor's time-value-of-money expectations and any home-country tax treatment of the Japanese activity.

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