Depreciation Methods in Japan: Straight-Line, Declining-Balance, and the U.S. MACRS Comparison

Status as of April 2026: In force. Method restrictions codified in Income Tax Act Enforcement Order Article 120-2 and Corporation Tax Act Enforcement Order. NTA reference: Tax Answer No. 2100 (Japanese). U.S. MACRS reference: IRS Publication 946. Last verified: 2026-04-18.

Note on currency: dollar conversions use an indicative rate of approximately ¥150 = US$1, rounded for readability.

Depreciation method is the second question after useful life — and in Japan, for real estate, the answer is fixed. Buildings must use straight-line depreciation (定額法). The declining-balance method (定率法) is not available for building structures. This sets the Japanese system apart from U.S. MACRS, where 200% declining-balance is the default for most depreciable property (though not residential or commercial real estate).

For foreign investors running the 4-year accelerated depreciation strategy, the method constraint matters less than it first appears — the acceleration comes from the compressed useful life (4 years for used wood-frame past statutory life), not from a choice of calculation method. But the distinction between method and useful life is worth understanding clearly, particularly for investors who also hold Japanese equipment or fixtures that may qualify for declining-balance treatment.

Straight-Line Depreciation (定額法)

Straight-line is the mandatory method for Japanese buildings. The formula:

Annual depreciation = Acquisition cost × Depreciation rate (1 ÷ Useful life)

Example: a wood-frame building acquired for ¥50 million, useful life 4 years (under the simplified method for used assets past statutory life):

• Depreciation rate: 1 ÷ 4 = 0.25 (25%)
• Annual depreciation: ¥50M × 0.25 = ¥12.5M
• Schedule: ¥12.5M per year for 4 years, totaling the full ¥50M acquisition cost

The annual amount is constant across all years (subject to first-year proration if the property is not placed in service in January — see the month-based allocation rules).

Straight-line is simple, predictable, and fully aligned with how Japanese tax authorities expect real estate to be reported. There is no filing election or optional form required for real estate — straight-line is the default and only available method.

Declining-Balance Depreciation (定率法)

Declining-balance applies a fixed percentage to the undepreciated balance each year, producing larger early-year deductions and smaller late-year deductions:

Annual depreciation = Remaining undepreciated basis × Depreciation rate

For equipment with a useful life of 4 years, the Japanese declining-balance rate is 50% (2 × straight-line rate, the “200% DB” method used for equipment acquired after April 2012; the pre-2012 “250% DB” method applies to equipment acquired before then). Official rate tables are published by the NTA under the depreciation rate ministerial ordinance (Japanese). Example on ¥5M of equipment:

• Year 1: ¥5M × 50% = ¥2.5M (remaining: ¥2.5M)
• Year 2: ¥2.5M × 50% = ¥1.25M (remaining: ¥1.25M)
• Year 3: ¥1.25M × 50% = ¥625K (remaining: ¥625K)
• Year 4: Remaining amount (with switch to straight-line when arithmetic favors): ¥625K

Compared to straight-line (¥1.25M per year for 4 years), declining-balance concentrates deduction into Year 1 (¥2.5M vs. ¥1.25M) but produces less in later years. Total depreciation is identical.

What Qualifies for Declining-Balance in Japanese Real Estate Context

Declining-balance is not available for:

• Buildings themselves (main structure)
• Structural attachments (附属設備 — since April 2016)
• Structures integral to the land (構築物)

Declining-balance remains available for:

• Detachable equipment and machinery within the building
• Fixtures that are classifiable as separate from the building structure
• Certain tenant improvements depending on classification

For a typical residential rental acquisition, the building and its structural attachments (wiring, plumbing, HVAC embedded in the structure) are all straight-line. Items that might qualify for declining-balance — specific equipment items — are usually small in relation to the building value and not a primary driver of the acquisition’s tax efficiency.

Method Choice vs. Useful Life

The most important point for foreign investors is that Japan’s aggressive depreciation — the 4-year wooden schedule — is achieved through the useful life compression (simplified method under Enforcement Order Article 129), not through the method.

On a used wooden building past its 22-year statutory life:

• Method: Straight-line (mandatory, no choice)
• Useful life: 4 years (statutory 22 × 20% = 4.4, rounded down)
• Annual deduction: 25% of building basis

The 25% annual rate exceeds what declining-balance would produce on the original 22-year useful life (where the straight-line rate would be 4.5% and the declining-balance rate would be 9%). The acceleration is in the useful life, not the method. Japan’s tax code uses life-compression rather than method-switching to create the accelerated schedule.

This design is coherent: the “4-year rule” reflects an administrative recognition that a building past its statutory life has limited remaining economic usefulness, rather than a choice between economic accounting methods.

The U.S. MACRS Comparison

For U.S. persons reporting Japanese property on the U.S. return, the method analysis is different:

Rate tables and recovery period definitions are in IRS Publication 946.

On the U.S. return, the building itself depreciates straight-line (aligned with Japan). The difference is:

1. Useful life: U.S. 27.5 years vs. Japan’s compressed 4 years for used wood-frame
2. No simplified method: the U.S. has no age-based useful life compression. A 50-year-old U.S. residential rental and a new U.S. residential rental both depreciate over 27.5 years.
3. Personal property component: U.S. “cost segregation” studies can allocate portions of an acquisition to 5-year, 7-year, or 15-year property, capturing 200% declining-balance acceleration on those components. This is not available in the Japanese treatment of the same property (building is unitary).

For a dual U.S.–Japan filer:

• On the Japanese return: Straight-line, 4 years (for qualifying used wood-frame)
• On the U.S. return: Straight-line, 27.5 years, optionally with cost segregation allocating some value to shorter-life components

The two computations run independently. The Japanese accelerated deduction does not carry to the U.S. return; the U.S. 27.5-year schedule does not constrain the Japanese 4-year schedule. Foreign tax credit via Form 1116 links only Japanese tax actually paid, not depreciation computations.

What This Means Practically

For a foreign investor acquiring Japanese residential income property:

Method choice is not a lever. Accept straight-line for the building and focus attention on the decisions that actually affect outcomes:

• Useful life (via structure and age). Maximize the use of the simplified method for used assets past statutory life — see Japan Depreciation by Structure.
• Building-to-land allocation. Maximize the defensible building share — see Building-to-Land Allocation.
• Placed-in-service timing. Capture a full-year of Year 1 deduction where possible — see When Does Depreciation Start?.
• Holding period. Preserve the rate arbitrage by clearing the 5-year threshold for long-term capital gains treatment — see Japan’s 5-Year Rule.

For equipment acquisitions separately from real estate — office furniture, specialized fixtures, detachable mechanical systems — declining-balance is worth considering where the equipment is material and has a front-loaded economic life. For the typical residential acquisition, equipment is immaterial to the after-tax outcome.

On the 2016 Building Reform

Before April 2016, Japanese building structural attachments (附属設備) could use declining-balance. The 2016 tax reform removed this option, aligning building-related assets under mandatory straight-line treatment. The reform was intended to simplify treatment and close a minor acceleration mechanism that had been available primarily for commercial property.

For foreign investors evaluating acquisitions in 2026, the pre-2016 option is historical and not relevant to current acquisitions. Only equipment and non-structural items retain the declining-balance alternative.

Related Reading

• 4-Year Depreciation on Used Wooden Buildings — the accelerated strategy this method enables
• Japan Depreciation by Structure — how structure drives useful life
• Building-to-Land Allocation — allocation that determines the depreciable base
• When Does Depreciation Start? First-Year Month Rules — month-based allocation
• Japanese Real Estate Tax Basics for Foreign Investors

This article is for general informational purposes only and does not constitute tax advice. Consult a qualified tax professional for guidance on your specific situation. U.S. readers: per IRS Circular 230, nothing in this article may be used to avoid penalties under the Internal Revenue Code.