Does anyone have information or experience on using an LLC, S corp, or C corp for mainly rental property income in America?
I assume that rental income from abroad is taxable for permanent residents in Japan even if it isn't remitted to Japan, so I'm trying to find tax efficient ways to keep this income separate from income that must be declared in Japan.
Foreign Rental Income
Re: Foreign Rental Income
Your assumption is correct. I'm not too sure about LLC etc. I have a feeling that if you're receiving any income abroad, it's fair game for taxation here. However there is an income tax treaty between America and Japan that might allow you to avoid double taxation. (Haven't read it in detail)
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teaandhobnobs
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Re: Foreign Rental Income
I believe that foreign rental income is only taxable in Japan if you are a permanent resident for tax purposes (broadly, if you have been here 5 years out of the last 10, not related to your visa status).
It's also worth noting that because of the tax rules, you can claim depreciation on the rental property (building only, not land) as an expense against your rental income, and if depreciation exceeds the rental income you can also offset it against other income from salary etc. Therefore, it can save a lot of money to declare your foreign property and the associated rental income. The number of years across which you can depreciate each type of building is as follows:
Steel frame reinforced concrete buildings or reinforced concrete buildings 47 years
Brick, stone or block construction 38 years
Metal construction (thickness of internal frame exceeds 4 mm) 34 years
Metal construction (thickness of internal frame exceeds 3 mm) 27 years
Metal construction (thickness of internal frame is 3 mm or below) 19 years
Wood or wood composite construction 22 years
Wood frame mortar construction 20 years
If your house is older than the number of years you can depreciate it over (e.g. if you own a brick house over 38 years old), it is considered to depreciate over 5 years, so you can deduct 20% of the value of the property from your taxable income each year for five years. This has the knock on effect of also reducing your juminzei, as that is based on taxable income.
The downside of this is that if you then sold the property, the base cost would be considered to be zero. If you then sold the property for market value, you would be liable for capital gains tax in Japan on the full sale price, rather than just the difference between the purchase price and the sale price (assuming you were a permanent resident for tax purposes at the time of sale). So if you are going to do that, it's probably best to do so with the intention of holding on to the property at least until you leave Japan.
Obviously none of the above is tax advice, but hope it is useful for reference.
Jon
It's also worth noting that because of the tax rules, you can claim depreciation on the rental property (building only, not land) as an expense against your rental income, and if depreciation exceeds the rental income you can also offset it against other income from salary etc. Therefore, it can save a lot of money to declare your foreign property and the associated rental income. The number of years across which you can depreciate each type of building is as follows:
Steel frame reinforced concrete buildings or reinforced concrete buildings 47 years
Brick, stone or block construction 38 years
Metal construction (thickness of internal frame exceeds 4 mm) 34 years
Metal construction (thickness of internal frame exceeds 3 mm) 27 years
Metal construction (thickness of internal frame is 3 mm or below) 19 years
Wood or wood composite construction 22 years
Wood frame mortar construction 20 years
If your house is older than the number of years you can depreciate it over (e.g. if you own a brick house over 38 years old), it is considered to depreciate over 5 years, so you can deduct 20% of the value of the property from your taxable income each year for five years. This has the knock on effect of also reducing your juminzei, as that is based on taxable income.
The downside of this is that if you then sold the property, the base cost would be considered to be zero. If you then sold the property for market value, you would be liable for capital gains tax in Japan on the full sale price, rather than just the difference between the purchase price and the sale price (assuming you were a permanent resident for tax purposes at the time of sale). So if you are going to do that, it's probably best to do so with the intention of holding on to the property at least until you leave Japan.
Obviously none of the above is tax advice, but hope it is useful for reference.
Jon
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eyeswideshut
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Re: Foreign Rental Income
In addition to the foregoing information, you can also deduct expenses related to the management, upkeep and purchase of the property (including airfare and other travel to the location of the property) from your global income. You also can offset any taxes paid to foreign governments related to the property. So there are potentially significant tax saving available for people in high tax brackets if you include the depreciation mentioned above. In regards to the capital gains on sale, it is correct your building will be valued at 0 for the purposes of calculating the gains. However, if you hold the property for more than 5 years, it will be taxed at a lower rate (I don't recall the rate off the top of my head) so you should plan to hold the property for a minimum of 5 calendar years.
Finally, my accountant has recently informed me that there may be a change in the law pertaining to the accelerated depreciation. I assume the law will make the tax benefits less generous but as far as I know no recommended changes have been published yet. So please be aware the above information may change and do your full due diligence before purchasing an overseas rental.
Finally, my accountant has recently informed me that there may be a change in the law pertaining to the accelerated depreciation. I assume the law will make the tax benefits less generous but as far as I know no recommended changes have been published yet. So please be aware the above information may change and do your full due diligence before purchasing an overseas rental.