Japanese wife on title on US house

[IWantToBreakFree]

Hi,
Does anyone know somebody or can help out the following situation?

Short version.
An American who has a house in USA with a Japanese wife on the title and how to deal with US AND more importantly Japanese taxes when sell the house. If she is on the title then have to do FIPRTA and if I take her off might it be considered a gift?

More details
I know I need to pay the capital gains tax but don't want to pay the Japanese gift tax. Under the Japanese tax code, my wife doesn't own any of the house because she didn't contribute. But US she is considered half owner and will need to do FIRPTA and withhold 15% of the sales price. I don't know how to claim her 1/2 on my Japanese taxes. And might it be considered a gift from me to her. I've checked with Japanese accountants and this is a grey area. I'm trying to find someone in the same or very close situation.

Thanks

[Tkydon]

You could try

https://smartaxnagoya.wordpress.com


You didn't mention your Tax Residence Status in Japan.
Are you a Permanent Resident For Tax Purposes (You have been here for more that 5 years in the last 10)?
Are you a Resident Non-Permanent Resident For Tax Purposes (You have been here for less than 5 years)?
Are you Non-Resident (You have been here for less than 1 year)?
Not in Japan?

Depending on the answer, do you plan to immediately remit the funds to Japan?

[IWantToBreakFree]

Thanks for the website. It looks very useful.
I have PR , been in Japan for 14 years.
Do you know or know someone in my situation?
There are many small details and I'm looking for someone in my situation.
I did work email https://smartaxnagoya.wordpress.com/ but they said they aren't able to help. So more advice or places would be great.

Again. THANK YOU

[bbkennyd]

Wow, this is a complex puzzle that you have presented. I'm definitely curious how this shakes out for you.

I think you should consult with a estate lawyers on both sides - lawyers familiar with the tax treaty and, on the American side, preferably in the state where the property is located.

I'm just an ordinary guy curious about taxes. I can't offer much advice, but just to throw an idea out there - how you took title and whether or not it's in a community property state might shape a large portion of the outcome. For example, if the house is in a common law state, your wife might only own a small portion of the house (depending on how you funded the deal). If this turns out to be the case, her gift to you might not be that consequential.

The bottom line is that the tax consequences of this sale make it essential that you structure your situation correctly - take your time and seek out some sound advice.

Also, assuming this has been a rental, don't forget about factoring in the depreciation recapture.

[ClearAsMud]

Under the Japanese tax code, my wife doesn't own any of the house because she didn't contribute.

Standard caveats in effect, but I believe this is mistaken: your wife does as a matter of fact own a portion of the property, only it's the result of a gift from you rather than her having made a contribution. Putting her name on the title is pretty much the definition of transferring partial ownership to her, and given your apparent tax status, doing so was a potentially taxable event in Japan that would normally have been reported at the time.

Even if there are circumstances that somehow exempted your wife from liability for Japanese gift tax at the time, the fact of joint ownership exists, and if you removed her name from the title without an actual sale, she would be transferring her current ownership back to you as another gift. In such a case, the US would consider her the one liable for any gift tax (no big deal for US citizens, though it may be different for nonresident aliens), whereas Japan -- where the recipient pays -- would consider you the one liable for gift tax. If you sell the house while it is still jointly owned, I don't know about FIPRTA (maybe it would conditionally apply to your wife's portion of the property), but my understanding is that under Japanese law, both of you would be responsible for filing individual tax returns in Japan based on the portion of ownership. This is why, if the US house is being rented out, your wife presumably already files Japanese income-tax returns for her apportioned share of the rental income -- joint returns basically don't exist here for married couples. (Anyone should feel free to jump in if I've somehow managed to misconstrue things.)

Given the obvious complexity, it's pretty much impossible for non-experts -- or at least someone without a similar experience -- to weigh in on the matter with any degree of confidence. Since the accountants you've already consulted call it a gray area and one place has told you they can't help, it's clear that even experts find dealing with such matters challenging. Foreign-tax credits should at least make it possible to avoid double taxation, but they don't change the unfortunate fact that you have to deal with both tax systems, and in the case of gifts between longtime Japan-resident international couples, that means paying Japanese gift tax. It's hard to say what you can do besides continue to look for qualified professional help. Maybe also try posting on r/JapanFinance (https://www.reddit.com/r/JapanFinance/)?

[bbkennyd]

I agree with @ClearAsMud. You gifted your wife part of the property - how much she owns is likely half, but depends on how you took title and what state the property is located in. I would simply add that the gift was potentially taxable in the US as well. In the US, there are various limits for gifts between spouses depending on immigration status.