Selling off land for retirement

[RolandB1]

So long story short, my wife, an only child, will likely inherit her parent's land which is worth approximately between 60-70,000,000 yen (550 m3 at 125000 yen per m3). With two kids we probably won't have a great deal saved for retirement so I was wondering if selling off land for retirement is a good strategy? I imagine that will amount to extra taxes, etc that need to be paid, but overall does it make sense to do this?

[Moneymatters]

With two kids we probably won't have a great deal saved for retirement so I was wondering if selling off land for retirement is a good strategy? I imagine that will amount to extra taxes, etc that need to be paid, but overall does it make sense to do this?

As you say, if you aren't sitting on a pile, it might not be viable to hold this as a different asset class.
The only situation you might want to keep as leasehold is if it's very well placed to have rental units on it. E.g. multiple developers competing to work on your land. That could create passive income and something to hand to your kids. Maybe leverage it as collateral for something else.

But you must definately speak to independant professional when the time comes. At face value having the asset back as money for you to invest/derive fixed income from will probably make more sense.

And you should probably stop reading now as I really haven't a clue what I'm on about.

Nope. OK then. A bit of googling shows the extra tax will be based on the difference between assessed value at time of inheritance and value when selling. (Minus costs of sale of at least 3%.) There will also be a small stamp duty of maybe 3万.

If you sell within 3 years 10 months you seem to be eligible for relief on inheritence taxes already paid.
https://souzoku.asahi.com/article/14136923
I couldn't follow that to be honest. It's already been a long day and I really need a drink...

It looks like the land's assessed value for property tax (固定資産税) purposes is used a the base for calculating the value as inheritence.
https://land.home4u.jp/guide/land-usage ... 9%E3%80%82
Section 3-2
相続税評価額≒固定資産税評価額÷0.7×0.8

Still not had a drink. And if I've not gone mad. That calc seems to restore the discounted 70% from likely sale value that is used for property tax calcs normally then gives a 20% discount. (I'm worse at maths than I am at Japanese or Geography*)
This means the assesed value for inheritance is higher than that for property tax calcs but still likely lower than what you could sell for. Phew.

Now remember. If you sell within 5 years the tax on that appreciation portion is 30%. And then Resident tax on top of that!
You know. To stop people speculating on the permanently rampant property market in Japan...
https://souzoku-zouyo.com/column_fudousan1.html
This article should frankly come with it's own Drinks cabinet!
But at least you can see the various taxes that will apply to any Profit you make(minus costs of Sales). There is a question/answer thing to see if you qualify for the fabled "My Home" 30mil allowance. (As no house you won't).

Anyhow, if you decided to hold it longer remember to factor in the property tax you'd pay each year whilst holding it. Unless you get someone to stick up a coin parking lot for a few years to cover that expense.
It should not be difficult to model the expected tax bill before and after 5 years. Then just see what maintenance/property tax would be to see if it's worth hanging onto for a while for a reduced tax bill..

Remember back when I said you should probably stop reading? Well. There is a high possibility that everything I've written above is factually incorrect.(Absolutely the worst kind of incorrect).
Hence the need to get independant advise at the appropriate time.
But a harmless scan of Tochi-dai for the value won't hurt. https://tochidai.info/

* I thought Veitnam was in South America (I blame the A-Team for that.) and I couldn't find Singapore on a globe despite having visited repeatedly.
So yeah. Do seek professional advice.

[RolandB1]

Many thanks for detailed (and amusing) reply. It seems that, as I thought, it’s going to take a lot more looking into. The problem is that my wife is pretty bad at understanding all this despite being Japanese.

[bostoninvestor]

Let me give this a try. 

I obviously don't know your age, nationality, tax status, income, current retirement savings, or the location of the land. 



However, what I do know is that as a real estate investor, raw land is considered the most speculative type of real estate investing. Let me share a quick story to illustrate the point.



My best friend inherited 30 acres of land in the US state of New Hampshire from his father about 10 years ago. My friend and his wife had decent paying jobs and didn’t really need the money so they just figured they’d hold on to the land and maybe sell it someday when they got close to retirement or pass it on to their own children. 



As my friend got close to retirement two years ago, he decided it would be good to sell the land and thought he would make a small fortune because land prices for country properties were rising due to the pandemic. However, every buyer that was interested actually tested the soil and they found it had problems. In the end, he was able to sell the land, but it was at a fraction of what he thought he would receive.



I think the upshot here is that in addition to paying taxes on raw land, there is also the risk that the soil itself could become contaminated or toxic depending on where it is located. Thus, I definitely think you should sell it, if you can!

Then the question becomes what do you do with the proceeds? Before, we can answer this, we need to know if you or your wife have any guaranteed sources of retirement income that you can count on when you retire.



In other words, will you both be eligible for Japanese government pensions? Do you have a guaranteed pension from your home country as well? Do you have any sort of company pension that will pay you even a small amount every month? 



This is hugely important because your first retirement money goal should be to get a “guaranteed” income stream that will cover your most basic necessities such as food, shelter and clothing. One way to do this would be to take the money from the raw land sale and buy an annuity, which would pay you a guaranteed fixed amount every month. I don’t want to go down the annuity rabbit hole here, but you will have to do some homework and find a low fee annuity, but it can easily be done if you put in a little effort. 

I’m not promoting annuities, but the point is that any vehicle that can give you semi-guaranteed cash flow every month is what you are after. 

Anyway, good luck on your decision.

[DragonAsh]

I know bostoninvestor noted that he wasn't recommending annuities, but just to hammer the point home, DO NOT get an annuity. Rarely is it ever the prudent choice. Frequent problems include: Not earning interest, if you die the annuity dies with you (ie, your spouse wouldn't receive any death benefits), annuities may not keep up with inflation (yes, even Japan may need to worry about that), fees can be predatorial, and most importantly, you often have no control over the investment once purchased.

[TokyoBoglehead]

I know bostoninvestor noted that he wasn't recommending annuities, but just to hammer the point home, DO NOT get an annuity. Rarely is it ever the prudent choice. Frequent problems include: Not earning interest, if you die the annuity dies with you (ie, your spouse wouldn't receive any death benefits), annuities may not keep up with inflation (yes, even Japan may need to worry about that), fees can be predatorial, and most importantly, you often have no control over the investment once purchased.

I've always pretty much been against annuities. There are some better options out there.

1. SBI and Rakuten can be setup to automatically sell investment trust to great an income steam.

2.You can buy treasuries directly and earn yield in USD.

3. Dividend funds and bonds funds are an option of course.

Annuities are only for those who cannot maintain or setup these systems. There are some decent products, but all are suboptimal to the above alternatives.