Taxed despite no capital gains | Misunderstandings about capital losses

I sometimes receive consultations where people say, 'My parents bought a house for 20 million yen and sold it for 18 million yen, yet somehow I'm being told I owe taxes.' While I can understand the feeling that 'I shouldn't have to pay taxes because I sold it at a loss,' there is actually a pitfall here.

Overlooking building depreciation

Because buildings (as opposed to land) are considered to decrease in value year by year, tax law requires a calculation called 'depreciation.' When selling inherited real estate, the acquisition cost of the building is calculated by taking the original purchase price and subtracting the depreciation based on the holding period, resulting in a 'depreciated amount.'

For example, if you sell a property purchased for 20 million yen (5 million yen for land, 15 million yen for the building) after holding it for a long time, the acquisition cost of the building will have decreased significantly. As a result, the 'book value acquisition cost' may fall below the actual sale price, leading to a determination that a capital gain was made.

'Feeling like you lost money' vs. 'Tax loss'

Even if you feel like you 'sold it for a low price,' there are cases where it is determined that you made a profit for tax purposes. Whether you actually have a tax loss (capital loss) can only be determined by calculating it accurately. You need accurate calculations, not just feelings.

Taxes arise even if you don't have the money on hand

What is easy to overlook here is the issue of funds for tax payments. If you assume that 'I sold it at a loss, so there won't be any taxes' and use the proceeds from the sale for living expenses or other payments, you may find that when an unexpected tax bill arrives later, you no longer have the cash on hand to pay it.

Because you didn't plan on the premise of making a profit, you didn't set aside funds for taxes—this is what leads to the situation where you have to pay taxes despite not feeling like you made any money.

Accurate calculation of acquisition cost is essential

To prevent this miscalculation, it is important to calculate the 'accurate acquisition cost (after depreciation)' before selling, and to estimate whether you will actually make a profit and, if so, how much the tax will be. This requires tax knowledge and is a point that is easy to overlook. I strongly recommend consulting with an expert before proceeding with the assumption that 'there shouldn't be any profit.'

* This article is an explanation of general tax information; please consult a tax accountant regarding individual cases.

📖 Recommended reading

Here is the gap between the feeling that 'I must have lost money' and the reality after doing the calculations.
→ Why I was crying while crunching the numbers | Saito

Here is how to think about selling an inherited house without losing money.
→ How to avoid losing money when selling inherited real estate | Saito

I share information related to real estate sales and inheritance from a tax perspective. I believe my role is to help those who are 'worried about taxes and can't seem to get started' understand the big picture first.

The assumption that 'I shouldn't have to pay taxes because I sold it at a loss' can be avoided if you confirm the accurate acquisition cost before selling.

I also share this information in collaboration with real estate agents. They are colleagues who value standing by your side with the same perspective.
As a real estate agent who can deliver value | Saito

Let's take a step forward with confidence, together.