Sell Rentals Before Tax Residency

[FaiyaaJapan]

Hello,

US citizen with 4 rental properties back in the US. I am currently not a tax resident in Japan, still on a working visa. I am about 2 years into my 5 years.

In regards to the rental properties I am thinking about selling them in the next few years as they have appreciated well. My question is it beneficial to me to sell before I hit 5 years and become a tax resident?

My thinking is if I keep them and sell after I become a tax resident I will have to pay capital gains tax in both the US and Japan. However if I sell before becoming a tax resident I would just pay US capital gains tax.

Is my thinking here too simplistic? Am I missing anything?

[Tkydon]

US citizen with 4 rental properties back in the US. I am currently not a tax resident in Japan, still on a working visa. I am about 2 years into my 5 years.

If you have been here for 2 years (more than 1 year), you ARE a Tax Resident. You then fall into the sub category of Non-Permanent Resident for Tax Purposes. (This has nothing to do with your Immigration Status.)

In regards to the rental properties I am thinking about selling them in the next few years as they have appreciated well. My question is it beneficial to me to sell before I hit 5 years and become a tax resident?

After 5 years in Japan in the last 10 years, you will then fall into the sub category of Permanent Resident for Tax Purposes. (Again, this has nothing to do with your Immigration Status.)

My thinking is if I keep them and sell after I become a tax resident I will have to pay capital gains tax in both the US and Japan. However if I sell before becoming a tax resident I would just pay US capital gains tax.

Is my thinking here too simplistic? Am I missing anything?

In this case, it depends on the Capital Gains Tax Rate in the US.

If you sell before the 5 years, as a Non-Permanent Resident for Tax Purposes, and if you do NOT remit funds in the year of sale, the only capital gains tax is that payable in the US.

You can then remit savings to Japan in subsequent years Tax Fee, but doing so would expose you to tax on other foreign income in the year of remittance before the 5 years, as a Non-Permanent Resident for Tax Purposes.

After the 5 years, when you become Permanent Resident for Tax Purposes, you can then remit savings to Japan Tax Free, as you will be paying tax on all other foreign income in the year of remittance anyway.

On the other hand, if you sell after the 5 years, as a Permanent Resident for Tax Purposes, whether you remit the funds to Japan or not..., OR if you DO remit funds in the year of sale before 5 years, then the capital gain is taxable in Japan as well as in the US. The capital gains tax is capped at the higher of that in the US and that in Japan, as you can claim the Foreign Tax Credit in Japan for the capital gains tax paid in the US, to the maximum of the tax assessed in Japan; i.e. until it cancels the Japan Capital Gains Tax to zero, and no more.

However, the calculations will be based in USD in the US, and Yen in Japan, so will be higher in Japan, due to the decline in the value of the Yen, amplifying the dollar gain, over the last couple of years ;-(

As the property is not your Primary Residence, you get a Capital Gain Deduction of Y500,000 against Japan CGT.

Capital Gain is the Selling Price in Yen, minus the Buying Price in Yen, minus the Buying and Selling Costs in Yen, minus any investments in maintenance / upgrade of the property, but adding back any Depreciation you may have claimed in Japan over the duration of ownership (but you've only been here for 2 years so depreciation doesn't apply)...

If you have owned the property for more than 5 years, the Japan Capital Gain after the deduction of Y500,000 is taxed at 20.315% (15% National, 0.315% Reconstruction, and 5% Residents' Taxes), against which you can then claim the Foreign Tax Credit for amount of Capital Gains Tax paid in the US in Yen, however much that is.

If you have owned the property for less than 5 years, the Japan Capital Gains Tax Rate is a punitive 40.63% (30% National, 0.63% Reconstruction, and 10% Residents' Taxes).

The US Japan Tax Treaty - Articles 6 and 13 refer.

https://www.mof.go.jp/tax_policy/summar ... _ST_en.pdf


But, why would you want to sell? What would you do with the proceeds?

Especially if you don't know if you're going to stay in Japan for the long-term / rest of your life?

Especially if you have the properties financed with a long-term fixed interest rate (30 year fixed?)!

Simply keep the properties running, paying for themselves, and after the 5 years, you start paying Japanese Tax on Rental Income, with the Foreign Tax Credit for amount of Income tax paid on that income in the US.

Modernize to increase the rental income, refinance to take the equity out of the property (when rates are again low), take the equity from the refinancing (which is not taxable as it's a loan...) and use that to fund the down payment for the purchase of the next property and Modernize to increase the rental income, refinance to take the equity out of the property... rinse and repeat...

https://www.youtube.com/watch?v=fjwRoGsS0dg

https://www.youtube.com/watch?v=N4Eh0v5JiAg

You're already over the hump as you're already in the properties...

You can do 1031 Exchanges in the US, so you can roll the gains up tax free in the US... but not in Japan; you would have to pay CGT on each exchange...

[FaiyaaJapan]

Wow! Thank you! I’m going to have to read over your answer a few times as I’m not sure I got it all the first time over. Very much appreciate the detail.

To answer your question about why sell, you are correct in that we could keep them and keep renting out until they are paid off etc., but I think there comes a point when I’d rather just have the cash and invest it into an index fund.

Index funds don’t call with noise complaints or late rent. I’m paying a property manager while we live in Japan but that costs money too. We were lucky and I think have a good manager, but maybe one day she gives it all up.

I wasn’t against rolling the equity into new units but the prices in Seattle have sky rocketed since we bought and the rents vs mortgage payments don’t really work out anymore. I could look at other parts of the country but that would mean finding a new manager, going there, etc.

At some point I’d just rather have the dividend income which which would basically equal the cash flow we are getting.

Having said that, we may change our mind over the next few years…