Japan RE - Minimizing Taxes while Building a Bigger Portfolio

[Keen C.]

Hi BP!  

I joined recently after hearing much about the forum.  I'm an American based in Japan, and finally decided to take the plunge as a personal investor a couple months ago and acquired a 14 unit residential building in Osaka.  Seems like there are quite a number of BP'ers based in Japan, so here goes my first post:

In the U.S., it seems like a 1031 exchange would one of the better methods for building a bigger portfolio while minimizing tax leakage, but it doesnt seem like Japan has such a tax deferment scheme with respect to investment property (but there is such a scheme for self-use residential property in Japan).  In Japan, I understand the capital gains tax to be 39% for ownership less than 5 years and 20% for ownership greater than 5 years.

1. Given the above, how are BP'ers in Japan building bigger portfolios while minimizing tax leakage on capital gains as properties are sold in order to acquire properties?    

2. Or, rather than selling, would it be better to continually refinance and use the proceeds to acquire more property?

3. At what point (in terms of portfolio asset value) would there be benefits to start engaging an accounting firm to structure Japanese legal entities to hold property?

Thanks!

[Bill Exeter]

Originally posted by @Keen C.:

Thanks Bill, didnt know that regarding 1031 Exchange for foreign properties!  

1. However, Japan already has a tax treaty with the U.S. which would allow the investor to avoid double taxation insofar as tax returns are correctly filed in both the U.S. and Japan? 

Yes, they do have a tax treaty with the U.S., but what generally happens is that you compute the amount of U.S. taxes that would be due from the sale of the property in Japan and then you would receive a foreign tax credit for the amount of taxes paid in Japan against what you owe the U.S.  You would still owe U.S. taxes if the foreign tax credit is less than what you owe in the U.S.

2. Thus, the 1031 Exchange of foreign properties seems like it would be utilized only if the foreign country where the foreign property is situated does not have a tax treaty with the U.S.? 

No, see above.    

3. Bill, you tell me a bit more about which foreign countries your firm most regular encounters when administering such 1031 Exchanges of foreign properties?

We have administered 1031 Exchanges in about 40 different countries at this point in time.  The most frequent are: U.K., Canada, Australia, Canada and Mexico.