An Inherited House, Rental income and Depreciation

[TokyoSurvivor]

I have a question about inheriting foreign property and then renting it out.
Apologies if this has been answered before and happy if someone can point me in the right direction if it has.

I inherited a house in the UK a few years ago and then more recently started to rent it out.
When calculating the Japanese income tax to pay on the rental income, you can apply the depreciation of the property's value which is great.

However, what is the starting point to work it out? There are two options it seems:
1. The price my parents paid for it way back in the 1980s
2. The "Fair Market Value" (FMV) of the property at the time of inheritance. This value is also used to calculate inheritance tax you may owe.

Obviously that can make a huge difference. If we use the original purchase price, it's a tiny amount.

I imagine this scenario is not unusual for foreigners, but am surprised to find no clear guidance on it.
I do believe if the property was in Japan it would be simple and the FMV at inheritance would be used.
However, my accountant in Japan claims depreciation should be calculated using the original purchase price and not FMV at inheritance. Before I push back, I want to have some clear evidence (such as from the NTA).

If it is the case to use original purchase price for foreign properties, then this would create a two track tax system as most foreigners inherit properties from abroad, while most Japanese inherit properties from within Japan.

I must be missing something.

Any help on this appreciated.

[YouMeWeThem]

I'm not sure how it interacts with depreciation, but you inherit the cost basis in Japan. https://www.nta.go.jp/taxes/shiraberu/t ... o/3270.htm

[TokyoSurvivor]

Thanks for your answer.

This seems to be more about if selling the property and calculating CGT.
My case is a bit different and hoping someone can point me where to find out which value to use to calculate depreciation.

Maybe we start by confirming if it was a Japanese property?

[YouMeWeThem]

However, my accountant in Japan claims depreciation should be calculated using the original purchase price and not FMV at inheritance. Before I push back, I want to have some clear evidence (such as from the NTA).

I don't think your accountant is saying you should use the original purchase price because it's foreign. They're saying you should use the original purchase price because that's how taxes work here. You should confirm with them, but as far as I understand there's no two-track system like you're thinking.

Like I said, you inherit the cost basis so for example if you sell the property you would have to calculate your capital gains using the price your parents paid (which probably means a massive gain).

[YouMeWeThem]

https://www.nta.go.jp/law/shitsugi/shotoku/04/23.htm

This example is specifically about depreciation calculation, and they show that the calculation for the inheritor (B) uses the original purchase price of 10,000,000 yen.

[TokyoSurvivor]

Thank you again for the link.

I think this pretty much clears it up.
The original purchase price carries over for calculating depreciation.
Unfortunately that of course can mean a very low amount for real estate in comparison to it's actual value.

Is there a contradiction by the NTA?

Inheritance tax calculation - Uses FMV at the date of death (i.e. price used at probate)
Depreciation for rental income - Must continue the original acquisition cost from the deceased (e.g. original (and low) price at purchase many years ago).

So you pay inheritance tax based on the higher price, and yet can only claim depreciation based on the original lower price. No step up.