Foreign Rental Property Depreciation: The Japan Case

The answer in one minute

If you own a house in Japan and file a tax return somewhere else, three rules settle almost everything:

• You depreciate the building, never the land. On a Japanese purchase the land often carries most of the price, so the depreciable part is smaller than buyers expect.
• Your home country sets the period, not Japan. A US filer uses the Alternative Depreciation System (ADS): 30 years straight line for residential rental property placed in service after 31 December 2017, 40 years for property placed in service before that date and for non-residential buildings. The 27.5-year period you may have read about applies only to property inside the United States.
• Japan runs its own, much faster clock. The statutory useful life of a wooden home is 22 years, and a second-hand house whose life has already expired is written off over four years. Same building, same money, two completely different calendars.

Everything else in this article is about the consequences of that third line: a cash flow that looks profitable in one country and loss-making in the other, a foreign tax credit that arrives in the wrong years, and a recapture bill at resale that surprises owners who never claimed the deduction in the first place.

One warning before the figures. This is a general guide written by a property adviser, not tax advice for your situation. Depreciation is where a Japanese accountant and a foreign accountant most often talk past each other, and the cost of guessing is measured in years. Use it to ask the right questions, then have both sides confirm the numbers.

Why Japan and your own tax office never write the same number

Japan sets a statutory useful life (hotei taiyo nensu, hōtei taiyō nensū) per construction type, and depreciation (genka shokyaku, genka shōkyaku) runs straight line for buildings acquired since April 2007.

Construction	Japanese statutory life	US ADS life (foreign property)
Wood frame home	22 years	30 years (residential, in service after 2017)
Light steel frame, 3 mm or under	19 years	30 years
Steel frame, over 3 mm and up to 4 mm	27 years	30 years
Reinforced concrete	47 years	30 years
Any of the above, let commercially rather than as a dwelling	unchanged	40 years

The used-property formula that creates four-year write-offs

Japan does not make a buyer of an old house depreciate it over the remaining statutory life alone. The simplified method (kanbenho, 簡便法) works like this:

• Statutory life fully expired (a wooden house over 22 years old): useful life = statutory life x 20 percent. For wood, 22 x 0.2 = 4.4, truncated to 4 years.
• Partly elapsed: useful life = (statutory life minus age) + (age x 20 percent). A 10-year-old wooden house gives 12 + 2 = 14 years.
• The floor is two years, and fractions are dropped.

This is why so many Japanese investment pitches revolve around old wooden houses: the tax shield is front-loaded into four years. We explain the mechanism and its resale sting in our article on property depreciation in Japan and the 22-year wooden lever. Your own tax office, however, has never heard of that formula. It applies its own period to the building as you bought it, and a 60-year-old farmhouse is depreciated over exactly the same 30 years as a new one.

Splitting land and building: the number everything hangs on

No split, no depreciation. Japanese contracts routinely show a single price for land and building together, so you have to produce the allocation yourself and keep the evidence. Three methods are accepted in practice, in this order of strength:

Method	How it works	Strength
Contract shows consumption tax	Consumption tax (shohizei, shōhi-zei) is charged on the building only, never on land. Building price = tax shown divided by the rate (10 percent).	Strongest. Only when the seller is a taxable business, so not on most private sales.
Assessed values	Split the price in the same proportion as the fixed asset tax assessment (kotei shisanzei hyokagaku, kotei shisan-zei hyōka-gaku) of land and building, taken from the tax certificate.	Strong and available on every property. The usual choice.
Appraisal or construction cost	An appraiser, or a rebuild cost per square metre applied to the floor area.	Acceptable, and worth paying for when the building is genuinely valuable.

What this looks like on a real Japanese purchase

On rural and suburban stock the building share is often 20 to 40 percent of the price, because Japanese houses lose their accounting value while the land keeps it. That cultural fact, explained in our piece on why Japanese houses lose their value while the land holds it, is exactly why your depreciable base is smaller than a US buyer instinctively expects.

Two practical points that save arguments later:

• Ask the agent for the kotei shisanzei assessment certificate before closing. Getting it afterwards means a trip to the city office or a request through your agent.
• Keep the split you choose and apply it consistently: to the depreciable base, to acquisition costs, and to the gain calculation when you sell.

Your cost basis in dollars, frozen on day one

The second thing people get wrong is currency. Your basis is the yen price converted at the exchange rate on the date you acquired the property, and it never moves again. You do not restate it each year, and a yen that falls from 110 to 156 to the dollar does not shrink the deduction you already locked in.

What goes into the basis rather than into the year's expenses

Acquisition costs are capitalised into the basis and depreciated with the building, in the same land and building proportion. In Japan those costs stay at or under 6 percent of the price, which is low by international standards and covered in detail in our guide to purchase costs when buying property in Japan.

Item	Treatment
Agency commission, judicial scrivener (shiho shoshi, shihō shoshi) fee, registration and licence tax, stamp duty	Capitalise, split land and building
Real estate acquisition tax (fudosan shutokuzei, fudōsan shutoku-zei), billed a few months later	Capitalise or expense depending on your country's rules; be consistent
Renovation that betters the property or extends its life	Capitalise as a separate asset, own start date
Repairs that restore the existing condition	Expense in the year
Annual fixed asset tax, insurance, management fees, utilities	Expense in the year
Land, in every scenario	Never depreciated

If you renovate before letting, keep invoices separated by work type. A new roof and a repainted wall are not the same thing on a tax return, and the distinction is worth thousands over the life of the property.

Worked example: a 12,000,000 yen wooden house

Take a 1995 wooden house in Nagano, bought in 2026 for 12,000,000 yen (about $76,900 at 156 yen to the dollar), let long term at 65,000 yen a month. The assessment certificate splits the value 70 percent land, 30 percent building. Purchase costs run 6 percent, or 720,000 yen.

• Building share of the price: 3,600,000 yen. Building share of the costs: 216,000 yen.
• Depreciable base: 3,816,000 yen, about $24,460.
• Land: 8,400,000 yen (about $53,850), never depreciated.

The same building on two schedules

	Japan	US return (ADS)
Building age at purchase	31 years, statutory life expired	Irrelevant
Useful life applied	4 years (22 x 0.2)	30 years
Annual depreciation	954,000 yen (about $6,115)	about $815
Total written off	Identical: about $24,460. Only the timing differs.

What that does to the tax bill

Gross rent is 780,000 yen a year. After fixed asset tax, insurance, management and small repairs, say 180,000 yen, net income before depreciation is 600,000 yen (about $3,846).

Period	Japanese taxable income	US taxable income
Years 1 to 4	600,000 minus 954,000 = loss, no Japanese tax due	$3,846 minus $815 = about $3,031 taxable
Years 5 to 30	600,000 yen fully taxable	about $3,031 taxable
Years 31 onwards	600,000 yen fully taxable	$3,846 fully taxable

Read the first line again: in the years when Japan charges you nothing, your home country charges you almost in full, and there is no Japanese tax to credit against it. That is the trap, and it is entirely predictable.

Nagano is a real example rather than a hypothetical: the prefecture is one of the deepest sources of old wooden stock in our catalogue, as our Nagano property page shows.

The foreign tax credit trap: two calendars, one credit

Double taxation is normally solved by the foreign tax credit: Japan taxes the rent first, because tax treaties give the taxing right to the country where the property sits, and your own country credits what you paid. It works well when both countries tax roughly the same income in the same years. Depreciation is what breaks that alignment.

How the mismatch plays out

• Early years: fast Japanese depreciation means little or no Japanese tax, so there is little or no credit to claim, while your home return already shows taxable income. You pay at home, in full.
• Later years: Japanese depreciation is exhausted and Japanese tax appears, but your home deduction is still running, so your home taxable income is lower and the credit may exceed what you can use.
• Excess credits can generally be carried back one year and forward ten years in the US system, within the passive category. They are not lost immediately, but a credit you cannot use for eight years is worth far less than cash today.

Two details that soften it

First, a non-resident owner does not pay Japanese local inhabitant tax (juminzei, jūminzei) of about 10 percent, because it is charged on people domiciled in Japan on 1 January. Japanese tax on a small rental is therefore lower than headline rates suggest, and so is the credit. Second, withholding can apply at 20.42 percent on rent paid by a company or by an individual who does not live in the property themselves, and it is an advance payment recovered through the annual return, not a final tax. Both points are set out in our guide to rental income tax in Japan for non-residents, alongside the role of the tax agent (nozei kanrinin, nōzei kanrinin) that a non-resident must appoint.

Filing the Japanese side properly is not optional, and it is the return that produces your credit evidence: see our walkthrough of the kakutei shinkoku, the Japanese annual tax return. Keep the Japanese payment receipts: a foreign tax credit is only as good as the proof that the tax was paid.

Where you file changes the whole answer

Depreciation of a foreign building is one of the areas where tax systems diverge most. The table below is a map, not a ruling, and the rules move: confirm your line with a local professional before you file.

You file in	Building depreciation on a foreign rental?	Period or rate	Watch out for
United States	Yes, and it is mandatory	ADS 30 years straight line (residential, in service after 2017); 40 years if earlier or non-residential	Mid-month convention in year one; recapture at sale
United Kingdom	No allowance on the fabric of a dwelling	n/a	Foreign property income is computed on UK rules and reported on the foreign pages
Australia	Yes, capital works	2.5 percent a year over 40 years, for construction begun after 15 September 1987	Second-hand plant and equipment deductions were removed for residential property from 1 July 2017
Canada	Yes, but optional	Class 1 capital cost allowance, 4 percent declining balance	It cannot create or increase a rental loss; foreign property over CAD 100,000 is reported separately
France	No under the unfurnished property regime; yes when let furnished	Furnished lettings: component depreciation, commonly 25 to 40 years	Japanese income is taxed in Japan, with relief given in France under the treaty
Germany	Generally exempt with progression, so the income is recomputed under German rules	Building depreciation of 2 percent, or 3 percent for buildings completed after 2022	The exempt income still lifts the rate applied to the rest of your income
Spain	Yes	3 percent of the higher of construction cost or the assessed construction value	Foreign assets above 50,000 euros carry a separate reporting obligation
Italy	No depreciation for an individual	n/a	Foreign property income is generally taken at the net amount assessed abroad
Brazil	No depreciation for an individual	n/a	Foreign rent is taxed monthly, with treaty relief for Japanese tax

Two patterns jump out. Countries that allow a deduction rarely match Japan's speed, so the mismatch above is the norm rather than a US quirk. And countries that allow none at all, notably the United Kingdom, will tax the Japanese rent on a base that ignores the Japanese deduction entirely, which makes the Japanese tax shield worth much less to a British owner than to an American one.

The mistakes that cost the most

Skipping depreciation because the amount looks small

In the United States the basis is reduced by the depreciation allowed or allowable. Claim nothing for ten years and you still sell as if you had claimed it: the gain is computed on the reduced basis and you get no deduction in exchange. If you have already missed two years or more, the fix is a change of accounting method with a catch-up adjustment, not a stack of amended returns. Ask your preparer about it explicitly.

Forgetting recapture at resale

Depreciation is a deferral, not a gift. On sale, the part of the gain attributable to straight-line depreciation is taxed at up to 25 percent in the US system. Japan has its own capital gains rules with a sharp cliff at five years of ownership, which we cover in our article on capital gains tax when selling property in Japan. Plan the exit before the entry.

Applying the Japanese period to your own return

Four years of Japanese depreciation on a US or German return is not aggressive, it is simply wrong, and it is the single most common error we see in spreadsheets sent to us by buyers. The Japanese figure belongs on the Japanese return.

Restating the basis when the yen moves

The basis is historic. Currency movement changes what your rent is worth when converted and it changes the gain at sale, but it does not change the depreciation schedule you set on day one.

Depreciating the land, or the whole price

It happens more than you would think, usually because the contract showed one number. The land share is never depreciable in any of the systems in the table above.

Ignoring the reporting forms that sit beside the deduction

A house held directly is not a foreign financial account, but the Japanese bank account that collects the rent may well be reportable, and holding through a company or a trust pulls in a different set of forms entirely. Before you choose a structure, read our piece on setting up a Japanese company to invest: the tax reporting burden abroad often outweighs the Japanese benefit for a single house.

Conclusion: one house, two schedules, one plan

Depreciating a Japanese rental property from abroad is not complicated once you accept the central fact: the building is written off twice, on two clocks, and only the Japanese clock is fast. Split the land and the building with a document you can defend, fix your basis in your own currency on the day you buy, run the Japanese schedule and your home schedule side by side from year one, and decide in advance which years you are willing to pay tax at home without a credit to offset it.

Done in that order, the numbers are predictable. Done afterwards, they are a surprise, usually in the year you sell. If you are still choosing the property, our catalogue of Japanese houses for sale shows the prices these calculations start from, and the older wooden stock on our kominka for sale pages is precisely the category where the two schedules diverge the most. For the purchase itself, the whole process is set out step by step in our guide to buying a house in Japan, and our support package takes it from the search to the keys, with the Japanese paperwork handled alongside you.

Frequently asked questions

How many years do you depreciate foreign rental property?

Under the US Alternative Depreciation System, 30 years straight line for residential rental property placed in service after 31 December 2017, and 40 years for property placed in service before that date or for non-residential buildings. The 27.5-year period applies only to property located inside the United States.

Can I use 27.5 years for a house located in Japan?

No. Property used predominantly outside the United States must use the Alternative Depreciation System, which is 30 years for residential rental. Using 27.5 years overstates the deduction and creates an error that follows you to the sale.

Does Japan's 22-year wooden house rule apply on my home tax return?

No. The 22-year statutory life, and the four-year write-off that comes from it for an expired second-hand house, apply to the Japanese return only. Your own country applies its own period to the same building.

Is depreciation optional if I do not need the deduction?

In the US system it is effectively mandatory, because the basis is reduced by the depreciation allowed or allowable whether or not you claimed it. In Canada it is genuinely optional. Check your own rule before skipping a year.

How do I split land and building for a Japanese property?

Use the consumption tax shown on the contract when the seller is a taxable business, since it is charged on the building only. Otherwise split the price in proportion to the fixed asset tax assessed values of land and building, which are on the municipal tax certificate. Keep the document.

What exchange rate do I use for the cost basis?

The rate on the date of acquisition. The basis is then fixed in your own currency for the whole life of the asset and is not restated as the yen moves. Currency does affect the rental income you convert each year and the gain when you sell.

Is foreign rental property depreciation recaptured when I sell?

Yes in the US system: the gain attributable to straight-line depreciation is taxed at a maximum rate of 25 percent as unrecaptured section 1250 gain. Japan taxes the gain separately under its own rules, which change sharply after five years of ownership.

Do I have to report the Japanese house itself on a foreign assets form?

Real estate held directly in your own name is generally not a foreign financial asset, but the Japanese bank account receiving the rent can be reportable, and holding the property through a company or trust changes the answer completely. Confirm the forms with your preparer before you choose a structure.