Permanent Residency and being taxed on US assets/rental income

[gingerinnewyork]

Hi, new to the group and grateful to have found it! Mid-50s, American, in Japan 10 years and eligible for Permanent Residency.
I own property in the US and collect rental income on it. I pay US tax on it annually. Also have US investments with some capital gains/dividends/interest income I declare on my US taxes. My wife is also American.

Sorry if these questions are super basic....

1) If I get Permanent Residency, will I have to pay Japanese taxes on my US Income and US investments or do I just have to report everything?

2) If I do have to pay taxes in Japan as well as the US, how do I calculate the amount?

3) Could the US income change my tax bracket in Japan?

4) What are the upsides to Permanent Residency if I can continue to renew my 5-year visa?

5) Can anyone suggest a tax expert I could contact ?

Thank you! Much appreciated.

[captainspoke]

1. Actually, you should have been paying on it already. Just having PR or not is not the threshold difference.

2. Foreign taxes paid can be included in the calculations on both sides (US/japan), I could give you some instances of what I do, but your situation is different enough that you should find some expertise.

3. Possible.

4. Upsides depend a little on you present visa, but whatever that may be (spouse/employment), PR means losing one of those things doesn't throw up some kind of obstacle. Also, you could retire, given that you may be on a working visa.

5. perhaps some others will offer ideas, but on the US side, do you already use a CPA there?

[adamu]

One downside of PR (or other non-working visa) is that it signs you up to the exit tax. Definitely worth considering if you may choose to return to the US eventually. I don't fully understand it myself though.

Actually not much info about the exit tax online. Searching turns up some consultancy companies, Gaijinpot and... Retire Japan.

[RetireJapan]

One downside of PR

Also gift and estate taxes. Those also kick in after ten years though, so it's just prolonging the inevitable.

[gingerinnewyork]

Thanks to everyone who has responded so far. This is all new so it`s all quite helpful.

on the US side, do you already use a CPA there?

We have an American tax accountant for our US taxes only. She doesn`t seem to be familiar with any of this, though. Am now wondering if we should be using someone else. If anyone knows of a firm in the US as well as a tax accountant here in Japan, please let us know. Thanks!

[Beaglehound]

As the Captain said above, it is tricky in that you should have been reporting worldwide income since the ‘five years in Japan’ point. Given that your US income involves assets, it seems likely that if you start declaring this from now, somebody at the tax office might think to ask you about previous years.

One option is to go and do a mea culpa at the tax office. From all I have heard they are unlikely to hammer you if you do this, but it will likely mean going back a few years, a lot of paperwork, and of course paying the tax due.

The other option is to tell all to a tax accountant and get their advice on how to approach it. Hopefully someone will be along soon with a recommendation...that course will likely end in option one but with support

[gingerinnewyork]

The other option is to tell all to a tax accountant and get their advice on how to approach it. Hopefully someone will be along soon with a recommendation...that course will likely end in option one but with support

Thanks Beaglehound. I think this makes sense as well. Just need to find a tax accountant. If anyone knows someone who works with individuals (English speaker/writer a plus!) , I would appreciate the info!

[Chris]

What's the total value of all your overseas assets?

You may want to research "OAR" https://www.tytoncapital.com/investment ... shore-tax/

[captainspoke]

Thanks to everyone who has responded so far. This is all new so it`s all quite helpful.

on the US side, do you already use a CPA there?

We have an American tax accountant for our US taxes only. She doesn`t seem to be familiar with any of this, though. Am now wondering if we should be using someone else. If anyone knows of a firm in the US as well as a tax accountant here in Japan, please let us know. Thanks!

I think CPAs who can prepare and file your taxes for both countries are on the rare/uncommon side, or expensive.

With the US side handled, I think you're on your way--you'll know your tax(es) due there, which can then be used on your return here.

**

The other aspect of doing taxes here is how to log and account for ongoing income for your rentals, minus expenses. There seems to be some question as to whether you can deal with these as a lump sum for the year, or list them on specific dates received/paid, and so on. I'm not a property owner/landlord, so really just guessing and speculating with this.

There is also depreciation (here), which has changed relatively recently (it was quite favorable, much less so now).

Good luck!

[Tkydon]

OK, to reiterate what others have said above, and add some additional points.

When you have been resident in Japan for 5 years, whether you have Permanent Residence or not, you are then treated as a Permanent Resident For Tax Purposes. Then you are subject to Japan's Global Taxation, i.e. taxable on al you global assets, income and gains, just the same as US Global Taxation.

You can claim Foreign Tax Credits on both sides for taxes paid in the other jurisdiction under the US-Japan Tax Treaty.

The Tax Office can Audit you and they can go back 5 years and claim any outstanding taxes for the period with interest. Funnily enough it seems like just about the time you became liable for these taxes in Japan on your 5th anniversary.

You can go back and file, re-file or modify your tax filings for the past 3 years. The Kakutei Shinkoku at the Tax Office.
See Here:
https://www.nta.go.jp/english/taxes/ind ... /index.htm
https://www.nta.go.jp/english/taxes/ind ... 020/01.pdf

and Here:

https://www.nta.go.jp/english/taxes/ind ... oku301.htm


So, there is zero downside to applying for PR, and it means you can lose or change your jobs without fear of deportation...

Property. Up until last year, there was a very advantageous system where Japanese Tax would let you take Depreciation loses against Overseas Properties and offset those losses against your Japanese Income Tax. This was very lucrative, and could mean that if you file you may be due a sizable tax rebate on your Japanese Income Tax. Unfortunately, this loophole has been closed, and you can now only take the Depreciation Loss against the property's income.

Dividends. As a US Citizen, you would incur US Withholding Tax at 30%. This is more than Japanese Tax on Dividends and so the net would be that you would not have to pay Tax on those Dividends.

Capital Gains. You are subject to Japanese Capital Gains Tax on all overseas Capital Gains, but you can claim Foreign Tax Credits for Taxes paid overseas (in the US) on those capital gains.

https://www.nta.go.jp/english/taxes/ind ... /12007.htm

Somebody mentioned the Exit Tax.
As a Permanent Resident for Tax Purposes you are subject to the Exit Tax if you decide to permanently leave Japan. See Here:

https://www.nta.go.jp/english/taxes/ind ... /12004.htm

A Permanent Resident For Tax Purposes with assets greater than Y100,000,000 (US$ 909M) leaving Japan is taxed Capital Gains on his entire Global Assets as Marked to Market on his departure.


On Tax Returns.
The Japanese Tax Return has to files by March 14th. You have to put all you Figures Gross and then get taxed on them.

You can then use the Japanese Tax Return when you File Your US Taxes on April 14.

You can then go back ans amend your Japanese Tax Return with the Foreign Tax Credit information and they will reduce or refund the Credits.

You could go back and do this for the last 3 years. It wouldn't surprise me if you were in for a tax refund due to your rental property income.

How old are the buildings and what are they built of? Timber frame? Concrete? Reinforced Concrete? All treated differently for Depreciation.

You can claim depreciation on the structure but not the land, but not from this year on... Only back filings...
Timber frame buildings can be depreciated of 22 years, and if it's an old building you could claim accelleratated depreciation i.e. a big loss
Concrete can be depreciated of 30 years
Reinforced Concrete can be depreciated of 47 years
Note - This does reduce the Tax Basis of the property, so you will end up paying Capital Gains Tax on all that depreciation loss claimed when you sell the property...
Interior, Fixtures and Fittings can be depreciated of 15 years
Many items can be taken as an expense in the year incurred, including maybe travel back to the US to check the properties or look for new ones...
You can expense the Mortgage Interest and other expenses against the Rental Income.
And then claim that big negative number against your income to reduce you taxable income and therefore reduce the amount of tax you have to pay in Japan.


I can try and find out who my American friend in a similar situation uses to do his accounts...