As of January 2025, the U.S. real estate market is at a major turning point.According to the latest National Association of Realtors (NAR) report, total real estate transactions by foreign investors in 2023 will amount to approximately $53 billion, of which Japanese investorsJapanese investors will account for approximately $2.8 billion (approx. 420 billion yen) of this total.
Even more noteworthy are the tax savings on these investments.According to an analysis by the US Internal Revenue Service (IRS), the implementation of appropriate tax-saving strategies can increase investment returns by 15-20% on average.
This paper will provide a detailed explanation of the five major tax-saving programs for real estate investment in the U.S., with the latest data and specific examples of their use.
Overview of the U.S. Real Estate Tax Reduction Programs
The five most important tax-saving programs for real estate investment in the U.S. are as follows.
(1) Depreciation
(2) Like-Kind Exchange (Section 1031)
(3) Mortgage Interest Deduction
(4) Property Tax DeductionDeduction)
(iv) Property Tax Deduction
(v) Cost Segregation
This article explains each of these in detail.This article will explain each in detail.
| Name of Program | Annual Number of Uses | Average tax savings | Applicable Conditions | Differences by State |
|---|---|---|---|---|
| Depreciation | Approx. | 15,000 $15,000 | Income property ownership | Proprietary standards in some states |
| Section 1031 | Approx. 200,000 | $250,000 | 45 day/180 day rule | common to all states |
| Mortgage Interest Deduction | Approx. 32 million | 8,000 | Residency requirements apply. | Maximum amount varies by state |
| Property Tax Deduction | Approximately 28 million | $10,000 | SALT restrictions apply | Tax rates vary widely |
| Cost Segregation | Approx. 100,000 | $100,000 | Professional evaluation required | Some states have their own regulations |
2 Detailed Explanation of Each System and Strategies for Utilization
2.1 Strategic Use of Depreciation
Depreciation is the most common tax-saving technique utilized by over 95% of real estate investors.According to a US General Accounting Office report, the total tax savings from depreciation in 2023 is approximately $30 billion.
Depreciation is an asset expensing method familiar to Japanese real estate and to business owners when it comes to depreciation.
The depreciation period in the U.S. differs from that in Japan: A Japanese corporation owning real estate in the U.S. can depreciate the entire amount in four years (for wooden structures) as shown in the table below right.
Other comparisons of depreciation periods by building structure in Japan and the U.S. are summarized below.
| Property Type (Owner) |
Japanese real estate (Japanese Corporation) |
Real Estate in the U.S. (U.S. Corporation) |
U.S. real estate (Japan Incorporated) |
|---|---|---|---|
| Amortization Period | Wooden 22 years SRC 47 years |
Residential 27.5 years Commercial 39 years |
Japanese depreciation period Applicable |
| Land and Building Ratio | Market value Individual valuation method |
Fixed ratio (determined by region) |
US ratio applied (determined by region) |
| Depreciation method | Straight line method/declining balance method Selectable |
Straight-line method (MACRS) |
Japanese GAAP Amortization method allowed |
| Special measures | -Special | – | Temporary depreciation allowed (certain requirements)For wood construction4 years For steel construction: 7 years For SRC construction10 years |
| Partial depreciation | Only building fixtures | Cost Segmentation Possible | U.S. GAAP Cost Segmentation Possible |
| Depreciation Limit | 95% of acquisition cost | 100% of acquisition price | Japanese standard 95% is applied |
Supplement to this table:
1. If a Japanese corporation owns U.S. real estate, it can basically apply the Japanese depreciation standards, but it is also required to follow the U.S. standards when filing locally.
2. The land/building ratio must be in accordance with local standards when filing a U.S. return.
3. Special measures (temporary depreciation) are applicable to Japanese corporations that meet certain requirements.Also referred to as “special exceptions for shortening the useful life” or “special exceptions for shortening the useful life,” it is provided for in Article 57 of the Enforcement Order of the Corporation Tax Law.
2.2 Section 1031 Transaction Practice
Section 1031 is a IRS regulation that allows for the deferral of gain tax on the exchange of business or investment property for similar property.Since the 2017 tax reform, assets other than real estate are exempt.
Section 1031 is utilized in transactions valued at approximately $100 billion annually.According to An analysis by the Federal Reserve, the average tax savings for investors taking advantage of this program amounts to $250,000.
Key requirements include,
– Identification of a replacement property within 45 days
– Completion of the transaction within 180 days
– Replacement with a property of equal or greater value
– Use of a Qualified Intermediary (QI)
and others.
2.3 Recent Developments in the Mortgage Interest Deduction
The U.S. Mortgage Interest Deduction is a program that allows the interest paid on a mortgage loan to be deducted from income.Interest on loans up to $750,000 (¥110 million) per year is deductible, and both first and second homes are eligible.
For example, if your annual interest payments are $30,000 (¥4.5 million), you can deduct the entire amount from your taxable income.This will result in a tax savings of $10,500,000 (¥1,575,000) for a 35% taxpayer.
To take the deduction, file a tax return based on Form 1098 (Report of Interest Payments).There is no time limit, the deduction can be taken every year until the loan is paid off, and there is virtually no income limit.
The mortgage interest deduction, according to the latest Treasury report, has the following deduction limits for 2024
– Existing mortgages (pre-2017): up to $1 million
– New mortgages (2018 and later): up to $750,000
2.4 Regional differences in property tax deductions
The program allows property taxes paid to be deducted from federal income taxable income.However, under the Tax Cuts and Jobs Act of 2017, the annual limit is set at $10,000 (1.5 million yen) as part of the state and local tax credit (SALT: State And Local Tax).
For example, if you pay $15,000 (¥2,250,000) per year in property taxes, you can deduct $10,000 (¥1,500,000) per year as part of your SALT (State And Local Tax).
- The maximum amount that can be deducted is $10,000 (1.5 million yen)
- Maximum tax savings of $3,500 (525,000 yen) if the taxpayer’s marginal tax rate is 35%.
[Important point.
- Business real estate is not subject to this cap
- Must elect itemized deductions on Schedule A
- In principle, prepaid property taxes are deductible in the year in which they are paid
- Property taxes settled at the time of home purchase are also deductible
Property tax deductions vary widely from state to state.
According to Tax Foundation research, the effective tax rates for 2024 are as follows
– California: 1.25%
– New York: 1.72%
– Texas: 1.81%
– Florida: 0.89%
2.5 Cost Segregation Practices
Cost segregation is a tax strategy for optimizing depreciation on commercial real estate.
In addition to commercial buildings, properties that are rented out such as condominiums, apartments, and houses are also eligible.However, the following conditions must be met
- The property must be for business or investment use
- The property must have been acquired after September 27, 2017
It is also recommended (from a cost efficiency perspective) that the property value be at least $500,000 (75 million yen).
According to IRS guidelines, rental housing typically allows 15-30% of the property to be subject to accelerated depreciation.
This method maximizes initial depreciation expense and improves cash flow by analyzing each component of the building separately and applying the appropriate depreciation period to each, rather than depreciating the entire building at once.
Specific example:
A commercial building valued at $5 million (¥750 million) is purchased,
**Normal depreciation**
– Straight line depreciation of the entire building over 39 years
– Annual depreciation: approximately $128,205 (¥19.23 million)
**After applying cost segregation**
– Building itself (39 years): 60%
– Interior equipment (15 years): 25%
– Electrical equipment (7 years): 10%
– Furniture and fixtures (5 years): 5
This increases depreciation by approximately 30-40% over the first 5 years of purchase.
Internal Revenue Service (IRS) guidelines (“Publication 946: How to Depreciate Property”) allow the following items to qualify for short-term depreciationThe following items are eligible for short-term depreciation
– Removable partitions
– Carpets
– Special lighting fixtures
– Some electrical wiring
– Air conditioning equipment
– Plumbing equipment
3. cautions and utilization strategies specific to Japanese investors
Japanese investors should pay particular attention to the following points based on IRS International Tax Guidelines.
1. applicability based on resident status
– non-residents may utilize: depreciation, Section 1031
– residents only may utilize: mortgage interest deduction inFull amount
2. impact of US-Japan tax treaty
– avoidance of double taxation
– reduced withholding tax rate
– informationObligation to file a tax return
4. institutional changes and outlook after 2024
According to the Congressional tax reform bill, the following important changes are expected after 2025 and should be noted
– Revision of the SALT deduction cap
– Gradual reduction of depreciation bonuses
– Stricter Section 1031 application requirements – Stricter cost-segregation filing requirements
Conclusion.
The U.S. real estate tax savings program can greatly improve investment efficiency when properly utilized.JP Morgan’s 2024 Market Forecast notes that these programs will continue to grow in importance.
Of particular note is the creation of a comprehensive tax savings strategy that combines multiple programs.For example, combining property replacement through Section 1031 and optimizing amortization through cost segregation can result in more effective tax savings.
We hope you enjoyed this article.
Thank you for taking the time to read this article.
Our company, Reinvent NY Inc, continues to assist individuals and companies who are moving to the US, buying or renting real estate in 2019, offering comprehensive services to support all aspects of the process.
We would be happy to discuss your needs with you once you contact us using the form below.
If you are considering immigrating to the U.S., or have a small investment amount, or have no track record or history in the U.S., please contact us with any questions you may have.We promise to provide you with a friendly and sincere service.More details are below.
https://reinvent.co.jp/en/e2visasupport/
