Tax Refunds from a Japanese Rental Condo: The Loss Offset

Published October 26, 2026

Written by: Licensed real estate broker in Japan, 10 years at a listed real estate company, now a salaried landlord

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Short answer

A rental condo that shows a loss on paper lowers your total income, so part of the tax withheld from your salary comes back.

The refund lasts only while depreciation is large, and interest on the part of the loan used for land does not count.

How the refund happens

Rent
¥1,056,000 a year
− Expenses
depreciation, interest, fees
= Rental loss
−¥1,950,697 (year 1)
Salary − loss
lower total income
Refund
¥497,300

Japan taxes your income as a whole. When the rental property produces a loss, Income Tax Act Article 69 lets you subtract it from your salary income (this is called son-eki tsūsan, loss offset). Your employer withheld tax as if you only had a salary, so after you file a final tax return the difference is refunded, and the resident tax deducted from your salary from the next June also falls.

Year 1 in the example

The example is a 14-year-old ¥22 million condo with ¥88,000 rent, a ¥21 million loan at 1.9%, and a salary of ¥8 million.

Rental income, year 1
Item	Amount
Rent received	¥1,056,000
Depreciation (building + equipment)	−¥1,590,600
Loan interest	−¥395,297
Management fee + repair reserve	−¥168,000
Rent collection fee	−¥52,800
Purchase costs (year 1 only)	−¥800,000
Rental income	−¥1,950,697

Depreciation is the largest expense, and you never pay it in cash: it spreads the cost of the building over its useful life. That is why a property can lose money on paper while costing you only a little each month.

The land-interest rule

Interest that can and cannot be offset (year 1)

Interest on the building part

¥237,178 counts

Interest on the land part

¥158,119 excluded

Special Taxation Measures Act Article 41-4. Here the land is 40% of the price, so 40% of the interest is excluded.

If the rental income is negative, the part of the loan interest that paid for the land cannot be used to reduce your salary income. In the example, ¥158,119 of the year-1 loss is excluded, so ¥1,792,578 is offset against the salary.

How long it lasts

Tax effect by year (income tax refund + lower resident tax)

Year 1

¥497,300

refund ¥318,100 + resident ¥179,200

Year 2

¥310,200

refund ¥204,900 + resident ¥105,300

Year 4

−¥36,800

profit on paper: extra tax

Year 3 is similar to year 2 (¥308,600). In year 4 the equipment has been fully depreciated, rental income turns positive (+¥121,183), and the property adds to your tax instead of reducing it. With a newer building the equipment lasts longer and the refunds are smaller but spread over more years.

Check this in your own case

The refund depends on your salary (your tax bracket), other deductions and the property. Enter your figures in the condo simulator and open the "Tax return & tax savings" tab to see each year.

Details: filing, resident tax and furusato nozei

Filing the return

File between February 16 and March 15 of the following year, at the tax office or online (e-Tax).
You need your withholding slip from work, an income statement for the rental (real estate income), the annual loan interest statement and the purchase documents.
The refund is paid to your bank account, usually one to two months after filing.

Resident tax

Resident tax is about 10% of taxable income and is charged the year after. Your municipality uses the tax return, so from the next June the amount deducted from your salary is lower. You do not receive this part as cash; you simply pay less.

The blue-return deduction

With one condo, the blue-return special deduction is at most ¥100,000, and it cannot make a loss larger. It only helps once the property shows a profit.

Furusato nozei

A rental loss lowers your income, so your furusato nozei limit falls too. In loss years, check the limit with the furusato nozei calculator, which accepts rental income.

Frequently asked questions

Q. Can I get a refund without filing?

A. No. The loss offset only happens through a final tax return.

Q. Why is the first year larger?

A. Purchase costs such as registration fees and stamp duty are deducted in the year you buy.

Q. Is depreciation money I lose?

A. It is the cost of the building spread over time. It lowers your tax now but also lowers your cost basis, which raises the taxable gain when you sell.

Q. Does this work for non-permanent residents?

A. Yes. Japanese rental income is taxed the same way, so a loss can be offset against a Japanese salary.

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