Selling an inherited house

[goodandbadjapan]

A few years ago my father-in-law passed away. Part of his estate was a very small, not very valuable house which was left to his daughters. The value was about ¥6 million. My wife and her sister owed no inheritance tax on the house as the estate fell within the permitted values. Now, they then sold that house for the same price as it had ben valued at when it passed to them. At the time, I said I didn't think any tax would be due on the sale as there had been no gain in value on the property since it became theirs. Surely no CGT would be due. However, after dealing with the sale the accountant said tax was due and they paid a certain amount.It seemed to be based on the original purchase price of the house some 40 odd years ago, but surely a gain should only be based on the value as it has risen since it became their property. I largely kept my nose out of it as it was their business but I did wonder what this tax would have been for.

The reason I bring this up here is that last year my wife's sister's husband passed away. My sister-in-law has inherited his house (again no tax due) and she has just agreed to sell it. The price, again, is the price it was valued at when she inherited it. So again, there is no gain. Yesterday, she was wondering aloud how much tax would be due. Can anyone explain why tax would be due on a sale that has no gain since it changed ownership? It doesn't seem to make sense to me but before I get involved, I wonder if anyone here can explain it?

[Beaglehound]

Bear in mind that the land value is separate from the building (which with an old house would basically have no value). I don’t know why the heir would be responsible for any tax in the situation you outline though.

[goodandbadjapan]

Bear in mind that the land value is separate from the building (which with an old house would basically have no value). I don’t know why the heir would be responsible for any tax in the situation you outline though.

Yes, the values I mentioned were house and land. I wondered if there might be some sort of general tax due on property sales that I was unaware of.

[captainspoke]

Google says:

Secondly, Japan does not have the step-up basis rule of inheritance. When an heir receives an asset, the asset’s cost is the same as the cost of the deceased’s purchase.

I think that's more for something like stocks or fund shares. Houses/property here are unusual in that the structure can depreciate while the land may gain value--not sure how that works out for the tax office.

Statutory inheritors (wife/kids) may receive something tax free due to their relationship with the deceased. But then for sale of something, I believe the 'original' cost basis is used.

[goodandbadjapan]

Google says:

Secondly, Japan does not have the step-up basis rule of inheritance. When an heir receives an asset, the asset’s cost is the same as the cost of the deceased’s purchase.

I think that's more for something like stocks or fund shares. Houses/property here are unusual in that the structure can depreciate while the land may gain value--not sure how that works out for the tax office.

Statutory inheritors (wife/kids) may receive something tax free due to their relationship with the deceased. But then for sale of something, I believe the 'original' cost basis is used.

Ok, thanks - it sounds lime it might have been done on that basis. The property was purchased so long ago that the land's value was more than it had been at time of original purchase. But by that reasoning if someone inherits a house that doesn't fall within the IHT exemption they will pay tax on it and then also pay CGT based on when the deceased purchased it, which could be a lot if the land was purchased a long time ago!

[Beaglehound]

Google says:

Secondly, Japan does not have the step-up basis rule of inheritance. When an heir receives an asset, the asset’s cost is the same as the cost of the deceased’s purchase.

I think that's more for something like stocks or fund shares. Houses/property here are unusual in that the structure can depreciate while the land may gain value--not sure how that works out for the tax office.

Statutory inheritors (wife/kids) may receive something tax free due to their relationship with the deceased. But then for sale of something, I believe the 'original' cost basis is used.

Ok, thanks - it sounds lime it might have been done on that basis. The property was purchased so long ago that the land's value was more than it had been at time of original purchase. But by that reasoning if someone inherits a house that doesn't fall within the IHT exemption they will pay tax on it and then also pay CGT based on when the deceased purchased it, which could be a lot if the land was purchased a long time ago!

If that is the case I imagine there might be serious implications for those inheriting property overseas, considering how prices have rocketed in several countries over the past few decades.

[Tkydon]

If that is the case I imagine there might be serious implications for those inheriting property overseas, considering how prices have rocketed in several countries over the past few decades.

And the prices will be calculated at contemporary Yen Exchange Rates, so the current Yen Weakness can have a huge effect on the taxable gain.

There could be a local currency gain and a large, small or negative gain in Yen terms...
or
There could be a local currency loss but still a gain in Yen terms...

[captainspoke]

Up to/thru 1991 the yen/dollar rate was pretty close to today, sometimes even higher (some of the late 90s, too). Property bubbles (or the aftermath) along the way could also affect things.

OTOH, for a foreign property purchased in 2011-2012, that has since appreciated...!

[Gareth]

I’ve oddly enjoyed thinking about this today! The following is an educated guess based on some discussions I’ve had today but I have no idea if it’s right.

Isn’t it the case that the amount subject to capital gains tax on a property is calculated as follows:

(Money you sell it for - fees for selling) - (money you bought it for + fees for buying).

In the case of inheritance, the “money you bought it for” is zero, NOT the value of the property.

To use some round numbers, imagine you sell it for 5 million, the selling fees are 500,000 and the cost of doing the inheritance paperwork was 500,000.

So capital gains tax would be due on
(5,000,000 - 500,000) - (0 + 500,000)
= 4,500,000 - 500,000
= 4,000,000

If owned less than 5 years, short term capital gains tax of 39.63% of 4 million is due. If owned more than 5 years, long term capital gains tax of 20.315% of 4 million is due.

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?

[goodandbadjapan]

I’ve oddly enjoyed thinking about this today! The following is an educated guess based on some discussions I’ve had today but I have no idea if it’s right.

Isn’t it the case that the amount subject to capital gains tax on a property is calculated as follows:

(Money you sell it for - fees for selling) - (money you bought it for + fees for buying).

In the case of inheritance, the “money you bought it for” is zero, NOT the value of the property.

To use some round numbers, imagine you sell it for 5 million, the selling fees are 500,000 and the cost of doing the inheritance paperwork was 500,000.

So capital gains tax would be due on
(5,000,000 - 500,000) - (0 + 500,000)
= 4,500,000 - 500,000
= 4,000,000

If owned less than 5 years, short term capital gains tax of 39.63% of 4 million is due. If owned more than 5 years, long term capital gains tax of 20.315% of 4 million is due.

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?

Well, I suppose it could work like that, but that is kind of the point of IHT and Gift tax, isn't it? To tax you on things you got for free?