Buying used residential property abroad, claiming large depreciation over a short period, and offsetting resulting losses against salary and other income was once marketed to wealthy investors. This method is restricted for income tax from 2021 onward.

However, depreciation of all overseas property has not been disallowed. The change concerns certain used foreign buildings andoffsetting losses attributable to depreciation against profits from other income. Understanding the scope also helps forecast operating cash flow and tax on sale.

Why were used overseas buildings used for tax savings?

The purchase price of a rental building is generally allocated through depreciation over its useful life, rather than fully expensed in the purchase year. For used assets, a simplified method can determine useful life when estimating the remaining usable period is difficult.

For example, once the statutory useful life has fully elapsed, the calculation uses 20% of that life, rounding down fractions of a year, with a 2-year minimum. A shorter life therefore produces larger annual depreciation. Certain capital expenditures and other circumstances may prevent use of the simplified method. NTA: Useful Lives of Used Assets

Some overseas buildings remain usable for many years despite their age. Depreciating a still-rentable building over a short tax period can produce expenses exceeding rent and a gap between cash flow and taxable results. Income tax reduction using this gap became an issue. This background is discussed in a Tax College research paper. The paper helps explain the policy background but is not legislation itself.

From 2021, the restriction concerns loss offsets

For individuals' used foreign buildings, losses attributable to depreciation based on useful lives calculated by the simplified method and similar methods are treated, under specified calculations, as not arising. That portion cannot offset salary or profits from domestic rental properties. The rule applies from 2021 onward; purchase before the reform does not by itself establish exemption. NTA: Offsetting Real Estate Income Losses Against Other Income

It is also insufficient to assume the rule applies only to the simplified method. Estimated remaining useful lives are covered too, except in specified cases where their appropriateness can be verified. Merely renaming the method an estimate does not remove the restriction. NTA: Depreciation of Used Foreign Real Estate Deducted from Real Estate Income Losses

Depreciation itself does not disappear

Consider a simple example: one covered used foreign building generates annual rent of JPY5 million, expenses excluding depreciation of JPY2 million, and depreciation of JPY6 million. With no other adjustments, the calculated loss is JPY3 million.

Because that JPY3 million loss is attributable to depreciation, it is unavailable for offset. The rule does not cancel all JPY6 million of depreciation and restore JPY3 million of profit. Depreciation still offsets rental income, but its ability to create losses offsetting salary is restricted.

Actual calculations must include multiple properties and allocation of shared expenses. The NTA's related circulars also specify reasonable allocation of shared expenses.

On sale, reflect previously unusable losses in acquisition cost

When a rental building is sold, acquisition cost is normally calculated by subtracting past depreciation from the purchase price and related costs. A lower acquisition cost produces a larger gain.

This special rule adjusts that calculation. When calculating cumulative depreciation to subtract from acquisition cost, cumulative losses treated as not arising under the rule are excluded. This prevents amounts that could not be offset during ownership from nevertheless reducing acquisition cost in full. Retain records of excluded losses through the sale, alongside annual tax returns. NTA: Calculating a Building's Acquisition Cost

Does corporate ownership solve the issue?

This is a personal income tax rule and does not apply in the same form to property held by a Japanese corporation. However, corporate losses cannot be deducted from an individual shareholder's salary either.

When comparing corporate ownership, include corporate tax, tax on transferring profits to the individual, maintenance costs, local filing burdens, and tax on sale. Falling outside a personal restriction and improving the investment's overall outcome are separate questions.

Check net proceeds through sale, rather than tax savings alone

For overseas property, vacancies, repairs, management fees, loan interest and repayments, currency movements, and local taxes all affect returns. Japanese gains are generally calculated from yen values at acquisition and sale, so a yen gain may arise even without appreciation in local currency. NTA: Taxation When a Resident Sells Overseas Real Estate

Where local income-equivalent tax is paid, consider Japan's foreign tax credit. However, limits and procedures apply; not all foreign tax can necessarily be credited against Japanese tax. NTA: “Foreign Tax Credit for Residents”

Before buying, combine annual after-tax cash flow with net proceeds after sale and debt repayment in one model. For existing holdings, review records of depreciation and losses excluded from offset. These are the starting points for analysis under the changed rules.

This article provides general information focused on rental property held by individuals resident in Japan. Nonpermanent resident tax scope, ownership through local entities, and the property's local tax system require individual review. It is based on NTA and other public materials reviewed on September 13, 2026.