Selling an inherited house

[ClearAsMud]

Am not sure at all if that is right but I would think the value of the property at time of inheritance and the original purchase price all those years ago are both irrelevant.

Do you think this could be right?

No, because inheritance tax and capital-gains tax are two separate tax categories. Inheritance tax, which is reported on an inheritance-tax return, is based on determining the value of the decedent's assets at the time of death. If the value of the estate at that time falls below the basic deduction, no inheritance tax is due and no inheritance tax return need be filed -- end of story. If you go over the basic deduction, the story continues.

Capital-gains tax on an inherited property that has subsequently been sold is reported on a kakutei shinkoku and is based on a comparison of the sales price with the purchase price. An heir will not have paid anything to acquire the inherited property, so the purchase price is the one paid by the parent (an American-style step-up in basis does not exist in Japan). Further, that price is divided into land value and house value, with the latter adjusted according to depreciation (i.e., the value of the house after depreciation is regarded as the purchase price).

So the formula reformulated -- omitting any buyer's fees associated with the original purchase and adding one further item -- is:

Money you sell it for - (money the parent bought it for - house depreciation + fees for selling) - special deductions applicable when selling real estate

Special deductions can get complicated and I'm not qualified to discuss them, but a couple (selling a personal residence and selling an akiya) are pretty substantial. Also, IF inheritance tax was actually paid on the property, the heir(s) can take a deduction based on that amount as long as the property is sold within three years of the inheritance-tax reporting deadline. Anyway, if the result of the above calculation is a negative figure, you have a capital loss (which, however, can only be used to offset gains connected with other real-estate transactions). If it is a positive figure, you have a capital gain and tax will be calculated according to how long the property has been owned, with five years marking the point at which tax changes from a short-term 39.63% to a long-term 20.315% (combined income and residence tax).

This site gives some useful information and simplified examples. One example posits a property bought in 2015 for 50 million yen, 20 million for the house and 30 million for the land. The property is inherited and sold for 60 million yen either in 2020 (less than five years) or in 2021 (after five years have passed). Depreciation on the house is set at 2.79 million (don't know where they got this figure), and selling expenses are 5 million.

Capital gain:

• 60 million - (20 million - 2.79 million + 30 million + 5 million) = 7.79 million

2020 tax:

• 7.79 million x 39.63% = about 3.08 million

2021 tax:

• 7.79 million x 20.315% = about 1.58 million

Conclusion (at least to the extent I understand it): knowing the original purchase price is essential for calculating any possible capital gain made on the sale of an inherited property. This is why it's important to keep sales contracts and other documentation of the purchase price. Not being able to document the purchase price can, in the worst case, result in a default value of 5% of the sales price being assigned as the purchase price, which makes a big capital gain -- and higher tax -- more likely.

[Gareth]

That’s a great answer! As ever, it’s never as easy as it looks!

The more digging we do, the more complicated it gets. It shows the value of having a professional help you, even if the cost of that sometimes hurts a bit!

[goodandbadjapan]

Conclusion (at least to the extent I understand it): knowing the original purchase price is essential for calculating any possible capital gain made on the sale of an inherited property. This is why it's important to keep sales contracts and other documentation of the purchase price. Not being able to document the purchase price can, in the worst case, result in a default value of 5% of the sales price being assigned as the purchase price, which makes a big capital gain -- and higher tax -- more likely.

If I remember correctly, this was a bit of an issue for my wife and her sister. They were having great trouble locating the original documents showing the purchase price. I'd need to check but it may be that they had to do as you said and pay a default 5% because I remember thinking it was more than I had expected!

Thanks for the great explanation.

[captainspoke]

... trouble locating the original documents showing the purchase price. ...

Could be wrong, but I'd thing there'd be a record of the transaction at the relevant 法務局.

[goodandbadjapan]

... trouble locating the original documents showing the purchase price. ...

Could be wrong, but I'd thing there'd be a record of the transaction at the relevant 法務局.

I brought this very point up with my wife today and she agreed there probably should have been but for whatever reason I don't think they sought it out at the time. Will know better this time around.

[ClearAsMud]

... trouble locating the original documents showing the purchase price. ...

Could be wrong, but I'd thing there'd be a record of the transaction at the relevant 法務局.

I brought this very point up with my wife today and she agreed there probably should have been but for whatever reason I don't think they sought it out at the time. Will know better this time around.

I don't think they keep a record of the purchase price, but if you've taken out a mortgage secured by the property, the value of the mortgage will be recorded in the land register, and that amount could be used to reach a more favorable estimate than the tax office allows without documentation.

It may also be possible to estimate the purchase price in other ways as long as the tax office is amenable: bank transfer records, mortgage records, tax returns showing the real-estate deduction, property-tax records, municipal surveys of land values and the like -- even a pamphlet advertising the price of a new condominium can be used to make your case. But the case will have to be made, and the final decision rests with the tax office.

[northSaver]

This issue of capital gains tax on an inherited overseas property is a bit worrying for sure. I wonder how many foreigners living in Japan know about it and actually pay it? If they don't pay it (accidentally or otherwise) then how would the NTA find out? Maybe if and when the money was transferred to Japan and you had to state where it came from? It seems like it was a law designed for Japanese houses that depreciate over time, and are valued separately to the land they're on. I think it would be very difficult to separate a British property into house price and land price, especially at a date many decades ago when it was first bought!

Actually my Mum in the UK sometimes expresses her desire to move to a smaller house now that she's alone, but my brother and I have not been very encouraging up to now. She's also in two minds about it, and knows it might be a bit much to move house at 85.

But in light of this tax law... if she did move to a smaller house then presumably the capital gains would be greatly reduced when she eventually passed? She bought the house she's in now about 50 years ago for a very low price and it's obviously gone up a heck of a lot since then (as have most house prices in England). But if she sold it and bought a new one...

Of course I wouldn't encourage her to move based on this alone! But it does shed a different light on the matter, does it not? Or is the CGT applied retroactively somehow to stop people from avoiding it in this way?

[goodandbadjapan]

This issue of capital gains tax on an inherited overseas property is a bit worrying for sure. I wonder how many foreigners living in Japan know about it and actually pay it? If they don't pay it (accidentally or otherwise) then how would the NTA find out? Maybe if and when the money was transferred to Japan and you had to state where it came from? It seems like it was a law designed for Japanese houses that depreciate over time, and are valued separately to the land they're on. I think it would be very difficult to separate a British property into house price and land price, especially at a date many decades ago when it was first bought!

Actually my Mum in the UK sometimes expresses her desire to move to a smaller house now that she's alone, but my brother and I have not been very encouraging up to now. She's also in two minds about it, and knows it might be a bit much to move house at 85.

But in light of this tax law... if she did move to a smaller house then presumably the capital gains would be greatly reduced when she eventually passed? She bought the house she's in now about 50 years ago for a very low price and it's obviously gone up a heck of a lot since then (as have most house prices in England). But if she sold it and bought a new one...

Of course I wouldn't encourage her to move based on this alone! But it does shed a different light on the matter, does it not? Or is the CGT applied retroactively somehow to stop people from avoiding it in this way?

If your mum sold her house and it is her principal residence then she would pay no CGT upon its sale, and any CGT later due by legatees would only be on the inherited new, smaller house and that CGT would obviously be much, much lower if anything at all. That does seem one way around it, although of course IHT might still be due if your mum consequently has a large sum of cash from the sale of the bigger house.

[northSaver]

If your mum sold her house and it is her principal residence then she would pay no CGT upon its sale, and any CGT later due by legatees would only be on the inherited new, smaller house and that CGT would obviously be much, much lower if anything at all. That does seem one way around it, although of course IHT might still be due if your mum consequently has a large sum of cash from the sale of the bigger house.

Thanks, but I don't think IHT will apply in my case. Just to be clear, the house is in the north of England and although it has gone up "a heck of a lot" since she bought it, it's nowhere near the crazy prices in and around London!

Actually, reading the article CAM kindly posted above in more detail, there may not be a CGT issue at all. One thing that struck me was that the 5 year rule applies to when your parent bought it, and not when you acquired it. So if my Mum didn't move then I would pay the lower rate of about 20% even if we sold it straight after her death. If she did move then I would pay about 40% CGT if she died within five years.

HOWEVER... according to the article there is a special deduction of 3000 man for parents who were living alone when they died, the house was built before 31 May 1981, and it is sold by the heirs within three years of the start of the inheritance. Since my half of the house probably won't be worth 3000 man then this means that I won't have to pay CGT at all.

Talking of "my half", presumably the calculations will take into consideration the fact that I only inherit half of the house, and won't be applied to the full house value? I would hope so. Actually my brother probably won't have to pay any UK CGT because the "purchase price" in the UK is the value of the property when you inherited it, not the price paid by your parent when they bought it.

In short, this may not be a big deal for some of us foreigners here who will inherit property abroad in the future.

[ClearAsMud]

HOWEVER... according to the article there is a special deduction of 3000 man for parents who were living alone when they died, the house was built before 31 May 1981, and it is sold by the heirs within three years of the start of the inheritance. Since my half of the house probably won't be worth 3000 man then this means that I won't have to pay CGT at all.

Yes, this is the akiya special deduction I mentioned, but be sure to note that this particular special deduction only applies to sales made by the end of 2023, and the property cannot have been rented out or used for commercial purposes in the meantime.

The full list of conditions for cases where the decedent was living in the property at the time of death is given on this NTA page. (There are different conditions for properties owned by a decedent who was in a nursing facility at the time of death.) A significant amount of documentation is required to claim this special deduction, which, to repeat, ends this year. I doubt this can be managed without professional help, especially since an overseas property is involved.