A Guide to Income Tax for Foreign Nationals
If you’re a foreign national living in Japan and you own rental property overseas, you may wonder whether you need to file a tax return in Japan for that income.
Japanese income tax rules consider two main factors when determining taxation for foreign nationals:
- Your residency status in Japan
- The source of the income (where the income is generated)
This article explains how Japanese income tax applies when foreign nationals earn rental income from real estate located outside Japan.
1. The Basics of Japanese Income Tax: Residency and Source of Income
Japanese tax law classifies foreign taxpayers based on two key points:
- Residency status (how long and in what way you stay in Japan)
- Location of the income source (where the rental income is generated)
We’ve explained these classifications in more detail in [this article], so feel free to refer to it for a deeper understanding.
2. How Is Rental Income Taxed in Japan?
Let’s look at how rental income from overseas real estate is taxed in Japan, based on the taxpayer’s residency status.
(1) Permanent Residents
If you are considered a permanent resident for tax purposes in Japan, your worldwide income is subject to Japanese income tax. This means that even if your rental income is earned outside Japan, you must still file a tax return and calculate the income based on Japanese tax rules.
Important Notes:
- Since the property is located overseas, local taxes may also apply in that country.
- To avoid double taxation, Japan allows two main options:
- Foreign tax credit
- Deducting the foreign tax as an expense
Additionally, because your rental income and expenses are likely in a foreign currency, you’ll need to convert them to Japanese yen when filing your tax return.
Currency conversion rules:
- Income: TTB rate
- Expenses: TTS rate
(Although the standard is TTM, the above rates are also accepted if applied consistently.)
(2) Non-Permanent Residents
① General Rule
If you are classified as a non-permanent resident, only the following types of foreign income are taxed in Japan:
- Income paid in Japan
- Income remitted (transferred) to Japan
You will still calculate tax under the comprehensive taxation system as with permanent residents.
And if foreign taxes are imposed in the source country, the same two options apply for avoiding double taxation:
- Foreign tax credit
- Expense deduction
② If Your Residency Status Changes During the Year
If your residency status changes mid-year—for example, from non-permanent to permanent—you may still need to file a tax return for the period after your status change.
For example:
- Jan 1 – Jun 30: Non-permanent resident
- Jul 1 – Dec 31: Permanent resident
In this case:
- For Jan–Jun, you do not need to file unless:
- The rental income is paid in Japan, or
- The rental income is remitted to Japan
- For Jul–Dec, as a permanent resident, you must file a tax return regardless of whether the income was brought into Japan.
(3) Non-Residents
If you are a non-resident of Japan, your rental income from property located outside Japan is not taxable in Japan.
3. What If You Buy Used Property Overseas?
(1) Special Rules May Apply
If you purchase used real estate outside Japan and your rental activity results in a loss, special rules may apply to prevent tax avoidance through excessive deductions.
For example:
Suppose you have the following situation:
- Rental income: –1,000
- Employment income: +800
Under normal rules, your loss from rental activity could offset your salary income, making the taxable income zero—even though you actually earned a salary. To prevent this, Japan introduced an exception rule.
(2) Details of the Exception Rule
This scenario assumes that a taxpayer has purchased a used property located outside Japan and, upon calculating their real estate income, has ended up with a loss. To calculate real estate income, it is necessary to identify all deductible expenses, one of which is depreciation. Depreciation is calculated using the building’s “useful life.” However, in the case of used buildings located outside Japan, the useful life is often determined using a simplified method, which may not accurately reflect the building’s actual usable period. As a result, the depreciation expense may exceed the rental income, leading to a significant paper loss. Therefore, if a loss arises from the rental of a used foreign property and the useful life is determined using a simplified method, the portion of the loss corresponding to the depreciation expense is deemed not to have occurred. That portion of the loss cannot be used to offset other types of income, such as employment income.
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