It is worth buying an old mansion where I currently live in?

[RMA]

UPDATE to my original post:
Finally managed to negotiate the price from JPY 35m to JPY 26.5m. The property tax is around JPY 170k yearly.

Scope of repairs etc. is as per the file attached.

What I understand with my limited japanese is that the point no. 1 refers to the damages caused because of water pipes and termites. Should I go for the inspection in this regards? According to the agent, since it is a RC mansion on 3rd floor of the building so chances of finding termites is very less and since I am already residing in this place for long so I should have known by now if there was any major problem with the water pipes. So basically inspection is not necessary in his opinion.

For the point no. 2 of repairs clause, according to the agent the owner would not be responsible for any repairs as I am already residing in this place and I will have to fix any problems from my side (this is the reason the owner is giving me big discount). Currently I don't find any major issues in the apartment.

Any suggestions on this matter?

[Tkydon]

That property tax estimate seems high. We are paying right around that amount for a house on land that cost around 140 million JPY 20 odd years ago.

I was also wondering why property tax is so high - maybe I've made some mistake in this regards, I'll have to recheck.

Probably more like Y160,000 per year

(posted before I saw the actual)

[Tkydon]

If the seller was selling a fully rented out unit to another landlord buyer, then the price would be determined largely by the actual amount of the annual rental income - the Rimawari.

You can check the Rimawari for similar apartments or buildings in your area, and do a simple napkin calculation:

The Annual Rent you Pay (not including management or other fees or taxes) / the Rimawari = the Price
or
The Annual Rent you Pay (not including management or other fees or taxes) / the Price = the Rimawari


That would tell you if you got a good deal.

So you achieved

189,000 x 12 / 26,500,000 = 8.558 % Rimawari... That is very respectable, and probably very difficult to find a better deal on a single unit.


The other way to look at it would be to look at the Split between the portion of the Land and the portion of the Structure.

You can easily value the land by checking the per Tsubo land price in your area and multiplying that by the actual allocation of your property.

If you know the original purchase price when the property was new, you can work out the price of the land at that time and work out if the price of the land has gone up in value or down in value. Over 33 years (1989 - Height of the Bubble) the price of the land has probably gone down in value significantly.

The other part of the purchase price is the Structure.

Under Japanese Accounting Rules, a Reinforced Concrete Structure has (For Accounting and Depreciation Purposes Only) a useful life of 47 Years (Don't freak out... if properly maintained can last much longer than that).

As it was built in 1989, if you were a purchasing landlord, you would potentially value the structure at

1 - (2022-1989) / 47
= 1 - 33 / 47
= 30.21% of the Portion of the Original Purchase Price when New allocated to the Structure.

For Accounting and Depreciation Purposes Only, it still has 30.21% of its Useful Life, or another 47 - 33 = 14 years of depreciation, and if properly maintained can last much longer than that. The accounting value of the structure would depreciate to zero, but the property will keep on going, the land price will rise, and if you were to rent it out, as the landlord, would keep on generating income for you.

As Consumption Tax is only payable on the Structure, and not on the Land. If you know the Original Purchase Price When New and the Consumption Tax Rate, you can reverse calculate the allocation of Price to Land and the Structure.

But again, it seems you got a very respectable deal.

[Beaglehound]

UPDATE to my original post:
Finally managed to negotiate the price from JPY 35m to JPY 26.5m. The property tax is around JPY 170k yearly.

Scope of repairs etc. is as per the file attached.

What I understand with my limited japanese is that the point no. 1 refers to the damages caused because of water pipes and termites. Should I go for the inspection in this regards? According to the agent, since it is a RC mansion on 3rd floor of the building so chances of finding termites is very less and since I am already residing in this place for long so I should have known by now if there was any major problem with the water pipes. So basically inspection is not necessary in his opinion.

For the point no. 2 of repairs clause, according to the agent the owner would not be responsible for any repairs as I am already residing in this place and I will have to fix any problems from my side (this is the reason the owner is giving me big discount). Currently I don't find any major issues in the apartment.

Any suggestions on this matter?

You are in a privileged position being already in situ, so as you say you would be aware of a lot of issues. From a layman’s POV it’s difficult to see how an inspection would be particularly useful with regard to water pipes. If there were any leaks/blockages you would be the first to know! Termites is a judgment call. In your shoes, I would probably listen to the agent.

[RMA]

If the seller was selling a fully rented out unit to another landlord buyer, then the price would be determined largely by the actual amount of the annual rental income - the Rimawari.

You can check the Rimawari for similar apartments or buildings in your area, and do a simple napkin calculation:

The Annual Rent you Pay (not including management or other fees or taxes) / the Rimawari = the Price
or
The Annual Rent you Pay (not including management or other fees or taxes) / the Price = the Rimawari


That would tell you if you got a good deal.

So you achieved

189,000 x 12 / 26,500,000 = 8.558 % Rimawari... That is very respectable, and probably very difficult to find a better deal on a single unit.

Based on this calculation the rimawari is very decent, however the management fees + repairs costs are very high, i.e, JPY 58,500 / month and the average here is only JPY 35,000 / month so factoring this difference the rimawari should be (189000 - 23500) x 12 / 26,500,000 = 7.5% which is also not bad.

The other way to look at it would be to look at the Split between the portion of the Land and the portion of the Structure.

You can easily value the land by checking the per Tsubo land price in your area and multiplying that by the actual allocation of your property.

If you know the original purchase price when the property was new, you can work out the price of the land at that time and work out if the price of the land has gone up in value or down in value. Over 33 years (1989 - Height of the Bubble) the price of the land has probably gone down in value significantly.

The other part of the purchase price is the Structure.

Under Japanese Accounting Rules, a Reinforced Concrete Structure has (For Accounting and Depreciation Purposes Only) a useful life of 47 Years (Don't freak out... if properly maintained can last much longer than that).

As it was built in 1989, if you were a purchasing landlord, you would potentially value the structure at

1 - (2022-1989) / 47
= 1 - 33 / 47
= 30.21% of the Portion of the Original Purchase Price when New allocated to the Structure.

For Accounting and Depreciation Purposes Only, it still has 30.21% of its Useful Life, or another 47 - 33 = 14 years of depreciation, and if properly maintained can last much longer than that. The accounting value of the structure would depreciate to zero, but the property will keep on going, the land price will rise, and if you were to rent it out, as the landlord, would keep on generating income for you.

As Consumption Tax is only payable on the Structure, and not on the Land. If you know the Original Purchase Price When New and the Consumption Tax Rate, you can reverse calculate the allocation of Price to Land and the Structure.

But again, it seems you got a very respectable deal.

The mansion was bought by the original owner (my landlord) during bubble time (1989) for JPY 106 million and he is offering at JPY 26.50 million so it's a 75% haircut for him. Don't know why he is taking such a loss, maybe properties in Japan depreciates this way or he has some other reasons. The agent told me that the landlord prefers me because I have been living in this place for last 7 years and haven't bothered him much in the past.

Last property tax records show below figures (in roundoff):
Assessed value of whole building - JPY 65 million - total tax JPY 206,000 - this apartment's portion JPY 30,000
Assessed value of apartment - JPY 8.7 million - total tax JPY 147,000

Can we reverse calculate the fair market value based on above details?

[RMA]

You are in a privileged position being already in situ, so as you say you would be aware of a lot of issues. From a layman’s POV it’s difficult to see how an inspection would be particularly useful with regard to water pipes. If there were any leaks/blockages you would be the first to know! Termites is a judgment call. In your shoes, I would probably listen to the agent.

Update on this situation: The landlord is entering into a insurance contract in which he pays only JPY 50,000 and if any problem is found then the insurance will pay me for repairs until JPY 5,000,000. As for me, instead of 3 months I can claim the damages for repairs until 2 years so I will wait for 2 years and will think of inspection around the end of the insurance coverage term.

[Tkydon]

The mansion was bought by the original owner (my landlord) during bubble time (1989) for JPY 106 million and he is offering at JPY 26.50 million so it's a 75% haircut for him. Don't know why he is taking such a loss, maybe properties in Japan depreciates this way or he has some other reasons. The agent told me that the landlord prefers me because I have been living in this place for last 7 years and haven't bothered him much in the past.

Last property tax records show below figures (in roundoff):
Assessed value of whole building - JPY 65 million - total tax JPY 206,000 - this apartment's portion JPY 30,000
Assessed value of apartment - JPY 8.7 million - total tax JPY 147,000

Can we reverse calculate the fair market value based on above details?

Yes, unfortunately, that is the reality if you buy assets that are grossly overpriced, but they didn't know that at the time... The mythical Oku-shon... (see what is happening in China at the moment... it's horrible)
Interest Rates were very high back then, in excess of 7%, but came down over the years, so he will have paid off the Mortgage completely (with your help).
In years he was living there (if he ever lived there), he would have had an Income Tax Credit against the Interest Paid. (You can also use this)
But while it has been rented out, he was able to take the Depreciation Expense (1/47 of the Structure Portion of the Purchase Price) every year against his other Taxable Income, giving him a huge tax rebate every year at his Marginal Income Tax Rate.

This may be the reason he decided to sell, if he is retiring and can no longer use the Depreciation Expense against High Marginal Tax Rate Income.

Taking the Depreciation Expense every year would bring down his Income Tax every year, and bring down the Tax Basis of the Property. He will still be taking a loss on the sale, so will take the money completely free of Capital Gains Taxes, so the investment was not as bad as it appears at first glance.

However, if you know how much down payment he made, he may actually be neutral, or even slightly in cash profit...

Consumption Tax was introduced in Japan in 1989 at a standard rate of 3.0%. Do you know if he paid Consumption Tax on the property, or did he buy it before Consumption Tax started? If he paid Consumption Tax, then you can calculate how much of the JPY 106 million was Structure and how much was land...

Unfortunately, the Assessed Value for Tax Purposes in not relevant in calculating the actual value of the property. It is much lower than the real value so that the taxes are tempered.

The most relevant calculation is the Rimawari calculation. The Owner could sell to another Buy-To-Rent Landlord at the Rimawari based on the current rental income. Therefore, this option is in competition with selling to an Owner-Occupier Buyer and limits the Sale Price.
The Management Fees (and maybe the Maintenance Fee) would not be included in the Rimawari Calculation as these would fall on the Tenant, and not as an expense on the Landlord.

Interior Fixtures and Fillings (bathroom, kitchen, wallpaper, etc.) would actually be depreciated over 15 years (1/15 Depreciation Expense every year). As you have lived there for 7 years, that is over half the useful life of the Fixtures and Fillings. If he sells to you he does not have to refurbish. If he wanted to sell to an Owner Occupier, he (or a Real Estate company) would probably have to do a major refurbishment which would have to be accounted for in the sale price, or he would have to sell at a discount to allow the buyer (or a Real Estate company) a margin of profit on refurbishment costs.

[RMA]

Yes, unfortunately, that is the reality if you buy assets that are grossly overpriced, but they didn't know that at the time... The mythical Oku-shon... (see what is happening in China at the moment... it's horrible)
Interest Rates were very high back then, in excess of 7%, but came down over the years, so he will have paid off the Mortgage completely (with your help).
In years he was living there (if he ever lived there), he would have had an Income Tax Credit against the Interest Paid. (You can also use this)
But while it has been rented out, he was able to take the Depreciation Expense (1/47 of the Structure Portion of the Purchase Price) every year against his other Taxable Income, giving him a huge tax rebate every year at his Marginal Income Tax Rate.

This may be the reason he decided to sell, if he is retiring and can no longer use the Depreciation Expense against High Marginal Tax Rate Income.

Taking the Depreciation Expense every year would bring down his Income Tax every year, and bring down the Tax Basis of the Property. He will still be taking a loss on the sale, so will take the money completely free of Capital Gains Taxes, so the investment was not as bad as it appears at first glance.

However, if you know how much down payment he made, he may actually be neutral, or even slightly in cash profit...

Consumption Tax was introduced in Japan in 1989 at a standard rate of 3.0%. Do you know if he paid Consumption Tax on the property, or did he buy it before Consumption Tax started? If he paid Consumption Tax, then you can calculate how much of the JPY 106 million was Structure and how much was land...

Unfortunately, the Assessed Value for Tax Purposes in not relevant in calculating the actual value of the property. It is much lower than the real value so that the taxes are tempered.

The most relevant calculation is the Rimawari calculation. The Owner could sell to another Buy-To-Rent Landlord at the Rimawari based on the current rental income. Therefore, this option is in competition with selling to an Owner-Occupier Buyer and limits the Sale Price.
The Management Fees (and maybe the Maintenance Fee) would not be included in the Rimawari Calculation as these would fall on the Tenant, and not as an expense on the Landlord.

Interior Fixtures and Fillings (bathroom, kitchen, wallpaper, etc.) would actually be depreciated over 15 years (1/15 Depreciation Expense every year). As you have lived there for 7 years, that is over half the useful life of the Fixtures and Fillings. If he sells to you he does not have to refurbish. If he wanted to sell to an Owner Occupier, he (or a Real Estate company) would probably have to do a major refurbishment which would have to be accounted for in the sale price, or he would have to sell at a discount to allow the buyer (or a Real Estate company) a margin of profit on refurbishment costs.

All good points! Thank you for taking your time and educating me.

From the papers I got, it appears that he took out the loan for JPY 106 million in July 1989 and paid it off in December 2018. Couldn't figure out exactly how much consumption tax he paid.

Anyway today I signed the contract so now no point in guessing the actual market value of the property. Although I wasn't looking to buy this particular place but the offer came my way and I like this house and it was well within my budget so I went for it.

Passed pre-approval for loan with SMBC at 0.5% interest rate for 100% value (no atama kin) + initial charges. Hope it is not bad?

What tax benefits I can expect from this deal? I heard there are some conditions to fulfil in order to get the tax credit for older secondhand houses.