Japan's 5-Year Rule: Short-Term vs. Long-Term Capital Gains on Real Estate

Status as of April 2026: In force. Individual rates are set in the Act on Special Measures Concerning Taxation Articles 31 (long-term) and Article 32 (short-term). The capital-gain calculation formula is in Income Tax Act Article 33. NTA references: Tax Answer No. 3208 (long-term) (Japanese) and No. 3211 (short-term) (Japanese). Last verified: 2026-04-18.

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

Japanese capital gains tax on real estate has one rule that every foreign investor needs internalized before acquisition: the holding period gate. Sell too early, and the tax rate is 39.63%. Sell even one day past the gate, and it drops to 20.315%. On a ¥100 million gain, the difference is ¥19.3 million (roughly $129K) — in one direction or the other, depending on the date of the sale contract.

The rule itself is simple. The catch is in how the holding period is measured, which is not by the acquisition date but by a calendar-based proxy. Foreign sellers routinely misread this and end up on the wrong side of the gate. This article maps the rule, shows how it synchronizes with the 4-year depreciation strategy, covers the corporate alternative, and compares to the U.S. system’s very different approach.

The Two Rates

For individual taxpayers, Japanese real estate capital gains tax is set at two rates separated by a single threshold:

The ratio is almost exactly 2:1. On a ¥100 million gain:

• Short-term tax: ¥39.63 million (~$264K)
• Long-term tax: ¥20.32 million (~$135K)
• Gap: ¥19.31 million (~$129K) on the same gain

This makes holding period the single largest lever on exit economics, larger than any marginal optimization of the gain itself.

The “January 1” Trap

The rule is not “5 years from the acquisition date.” It is measured from January 1 of the year of sale.

From the Act on Special Measures Concerning Taxation Article 31, paragraph 2: the holding period is evaluated at January 1 of the year the sale contract is executed. For a property acquired March 15, 2024 and sold February 10, 2029:

• Acquisition: March 15, 2024
• Sale date: February 10, 2029
• Measurement point: January 1, 2029
• Elapsed at measurement point: 4 years, 9 months, 17 days

This sale is short-term, taxed at 39.63%, even though the calendar gap between acquisition and sale exceeds 4 years and 10 months.

The same property sold February 10, 2030 would be measured on January 1, 2030 — exactly 5 years, 9 months, 17 days — and would qualify as long-term at 20.315%.

The practical rule for foreign sellers: to qualify as long-term, the sale must occur on or after the sixth January 1 following acquisition. For a 2024 acquisition, the earliest long-term date is January 1, 2030. Any sale in 2029 is short-term.

Foreign sellers relying on a five-year calendar count from acquisition routinely trip this. A seller who targets “early 2029” for a March-2024 acquisition will pay roughly double the capital gains tax versus waiting twelve additional months.

Synchronization with the 4-Year Depreciation Strategy

For investors running the 4-year depreciation strategy on used wooden buildings, the 5-year holding rule dictates the exit window:

Year 5 is a transition year with a specific feature: the depreciation shelter has ended, but the gain, if realized, is still taxed at the punitive short-term rate. This makes Year 5 the least attractive year to exit — the worst combination of no tax shelter and the highest capital gains rate. Year 6 is when the math turns: no depreciation (unchanged), but the long-term rate is now available.

This is the source of the common planning rule: “Four years of depreciation, one year of patience, sell in Year 6.”

How Depreciation Affects the Capital Gains Calculation

Depreciation reduces the book basis of the building, which increases the taxable gain at sale. The calculation under Income Tax Act Article 33, paragraph 3:

Capital gain = Sale price − (Acquisition cost − Accumulated depreciation) − Sale-related expenses

Concrete example: a ¥60 million acquisition (¥40 million building + ¥20 million land), sold in Year 6 at ¥60 million:

• Original building basis: ¥40 million
• Depreciation over 4 years: ¥40 million (fully depreciated)
• Remaining building basis: ¥0
• Effective acquisition cost at sale: ¥20 million (land) + ¥0 (building) = ¥20 million
• Taxable gain: ¥60M − ¥20M = ¥40 million
• Long-term tax: ¥40M × 20.315% = ¥8,126,000 (~$54K)

The ¥40 million gain is economically the recapture of the depreciation claimed in Years 1–4. The key point: this is taxed at the 20.315% long-term rate, not at a higher “recapture rate” the way U.S. §1250 unrecaptured gains are taxed at up to 25% on the U.S. side.

The Japanese system preserves the full rate spread. For a top-bracket Japanese resident:

• Deduction rate on Years 1–4 depreciation: up to ~55% (per NTA Tax Answer No. 2260 (Japanese))
• Exit rate on the recaptured amount: 20.315%
• Net after-tax benefit: (55% − 20.315%) = ~35 percentage points retained

This is the rate arbitrage that makes the 4-year strategy genuinely profitable in economic terms, not merely a deferral.

Corporate Treatment — No Short/Long Distinction

Japanese corporations face a flat treatment on real estate sales: gains are taxed at the corporate income tax rate (approximately 23% to 30% effective, depending on corporate size and the municipality of registration). There is no short/long distinction.

For holdings that may need to sell within five years, corporate ownership can produce a lower effective rate than the 39.63% individual short-term rate. For holdings certain to be long-term, individual ownership at 20.315% is typically lower than the corporate flat rate.

The ownership-structure decision interacts with other considerations (liability shielding, depreciation claim efficiency, ease of transfer to heirs, creditor access to property) and should be made in consultation with Japanese tax and legal advisors before acquisition.

The U.S. Comparison

The U.S. system differs on almost every dimension of this rule:

Holding period threshold. U.S. long-term treatment applies after one year of ownership, measured from acquisition date. Japan requires roughly six years (measured by the January 1 convention).

Rate brackets. U.S. long-term capital gains rates are 0%, 15%, or 20% depending on the taxpayer’s ordinary income bracket, plus a potential 3.8% net investment income tax. Short-term U.S. gains are taxed at ordinary income rates (up to 37% federal, plus state). The Japanese 39.63% / 20.315% rates are flat within each category.

Depreciation recapture. IRC §1250 unrecaptured gain on real property is taxed at a maximum of 25% — lower than ordinary rates but higher than the long-term capital gains rate. Japan does not separate recaptured gain from non-recaptured gain; the entire gain is taxed at the long-term 20.315% rate after five years.

FIRPTA (U.S.). The Foreign Investment in Real Property Tax Act applies to foreign sellers of U.S. real estate. It does not apply to U.S. persons selling Japanese real estate. U.S. sellers of Japanese property are subject to Japan’s own non-resident withholding of 10.21% on gross sale proceeds — 10% income tax plus 0.21% special reconstruction surtax — remitted by the buyer to the Japanese tax authority under Income Tax Act Article 212 (with Article 161 defining the Japanese-source income subject to this withholding). Final tax is reconciled on the seller’s Japanese return. Per NTA Tax Answer No. 2879 (Japanese), the withholding is waived for transactions up to ¥100 million when the buyer is an individual purchasing the property for their own or their family’s residence — a carve-out that does not apply to commercial or off-market luxury sales.

U.S. reporting of Japanese sale. A U.S. person reports the gain on Schedule D of Form 1040. Japanese tax paid on the gain is claimed as foreign tax credit on Form 1116. The two computations do not align — the U.S. return computes the U.S. gain using U.S. basis (reduced by U.S. MACRS depreciation on the 27.5-year schedule), while the Japanese return computes the Japanese gain using Japanese basis (reduced by Japanese simplified-method depreciation). The difference is substantive, and U.S. filers often show a smaller taxable gain on the U.S. side because the U.S. MACRS depreciation is lower than the Japanese accelerated depreciation.

Practical Planning Takeaways

For foreign investors evaluating Japanese real estate with an eye to exit:

• Build the contract date into the acquisition plan. Know at origination when the earliest long-term sale date falls. Assume 6 January 1’s away.
• Use Year 5 for optionality, not exit. If market conditions strongly favor Year 5 sale, the 39.63% rate might still produce an acceptable return — but assume the default is to wait.
• Do not confuse the Japanese 5-year rule with the U.S. 1-year rule. A U.S. investor’s intuition on holding-period planning will mislead if transferred directly to Japanese real estate.
• Consider corporate ownership if sale timing may be compressed. The 30% corporate rate is materially better than 39.63% for sales within five years.
• Coordinate with U.S. filing if dual filer. The U.S. return does not inherit the Japanese tax calculation; coordinate depreciation tracking on both sides from Year 1, not at exit.

Related Reading

• 4-Year Depreciation on Used Wooden Buildings — the strategy this rule anchors
• Placed-in-Service Date in Japan — when the acquisition clock starts
• Japan Depreciation by Structure — how structure choice affects the depreciation schedule
• Japanese Real Estate Tax Basics for Foreign Investors — the broader framework

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.