A home purchase can be considered the largest purchase in ones lifetime. While you are looking forward to your new life, some of you may feel the pressure when borrowing money.
Here, we explain the mortgage deduction (tax reduction), which you should know in order to alleviate your anxiety you may have about your mortgage. We will also explain how to calculate the deduction and the procedure flow, so please take a look at it as a reference.
Income tax deduction based on the balance of the mortgage loan
The official name for the mortgage deduction is “Special Deduction for Housing Loans. Although there are some conditions, individuals can receive an income tax deduction when they take out a mortgage.
If the deduction is not fully deducted from income tax, the tax is also deducted from the following year’s inhabitant tax. This system can be used not only for the purchase of new housing, but also for residential housing, including the purchase of second hand homes and remodeling.
Key Points of the 2022 Tax Reform
The mortgage deduction has been around for some time, but some of the details were changed in 2022. Let’s take a look at what has been revised.
Note that those who have received the mortgage deduction prior to 2022 will be subject to the previous deduction rates and conditions.
Environmentally friendly housing
The revised mortgage deduction for 2022 provides preferential treatment for environmentally friendly housing.
Recently, both in Japan and abroad, there has been a call for sustainability transformation (SX), i.e., changes in business and lifestyle toward a sustainable society. Governments too have made it a major objective to promote housing with high environmental performance.
Specifically, higher borrowing limits than for ordinary housing have been established for long-term quality housing, low-carbon housing, ZEH-level energy-efficient housing, and housing that meets energy conservation standards.
Each of these types of housing is subject to conditions such as installation of solar power generation and high-efficiency water heaters, as well as meeting insulation requirements and reducing energy consumption. On the other hand, new homes that receive building permits after 2024 and do not meet certain energy efficiency standards are not eligible for the mortgage tax deduction.
In recent years, an increasing number of companies, not only in the government but also in the private sector, have been encouraging the spread of housing for a sustainable society.
Deduction rate 0.7% for up to 13 years
The 2022 amendment also revises the deduction amount and the deduction period.
Previously, the deduction rate was 1% and the deduction period was 10 years (13 years for special measures), but for those who qualify for the mortgage tax deduction after 2022, the deduction rate is 0.7% and the deduction period is 13 years (10 years for existing homes and additions or alterations).
Reasons for the reduced deduction rates include low interest rates over a long period.
When the deduction rate was 1%, low interest rates meant in some cases the deduction was more than the interest on the loan. It is said that the deduction was lowered in order to correct a situation that went beyond the original intent of the mortgage tax credit, which was to reduce the tax burden.
Although the deduction rate has been lowered, it is still a highly beneficial program for mortgage borrowers, as the deduction can be taken for up to 13 years.
Mortgage Deduction (Tax Abatement) Eligibility Requirements by Housing Type
To qualify for the mortgage deduction, certain conditions must be met. The conditions differ depending on whether the home to be acquired is new, used, or remodeled, such as additions and renovations.
Let’s take a look at the conditions that must be met in order to qualify for the new mortgage deduction after 2022.
Applicable conditions for new housing
The following conditions must be met for the purchase of a new home
- The person seeking the tax credit must personally occupy the residence within 6 months of the date of delivery or completion of construction.
- The total income for the year in which the special tax credit is claimed must be less than 20 million yen.
- The floor area of the eligible residence must be 50 square meters or more, and at least one-half of the floor area must be used for the applicant’s own residence.
However, if the total income is 10 million yen or less, and the floor area of the new house is between 40 square meters and 50 square meters if the house is newly constructed and approved by the end of 2023, the total floor area of the house must be between 40 square meters and 50 square meters.
- The applicant must have a loan for more than 10 years on the eligible residence.
- No special exception for taxation on long-term transfer income from the transfer of residential property has been applied for a total of five years, including the year when the house was used as a residence and the two years before and after the year when the house was used as a residence.
Due to differences in calculation methods, the floor area may differ between the sales contract and what is registered. Since the floor area is determined based on the number on the registry, please be careful when applying for the mortgage deduction.
Applicable conditions for purchase and resale
A purchase and resale is a property sold after a company has purchased and renovated an existing home. For purchase and resale, the following conditions must be met in addition to the applicable conditions for new homes.
- The home must be acquired from a registered real estate brokerage.
- The home must be acquired by a registered real estate brokerage, remodeled, and sold again within two years.
- 10 years must have passed since the house was newly built at the time of acquisition.
- Remodeling costs must account for at least 20% of the property price.
- Eligible construction work such as major repairs, work to comply with seismic standards, barrier-free renovations, and energy-saving renovations must have been performed.
When receiving the mortgage deduction for purchase and resale, there are detailed conditions regarding renovation costs and construction work. When considering purchasing a property, confirm with the seller in advance whether the property meets the requirements for the mortgage deduction.
Applicable conditions for second hand homes
In addition to the eligibility requirements for a new home, a second home must meet one of the following conditions;
- The house must have been built on or after January 1, 1982.
- Must meet current earthquake resistance standards.
For home built pre-1981, a certificate of compliance with seismic standards or other documentation is required.
Applicable conditions for remodeling and additions
In the case of remodeling or additions, in addition to the applicable conditions for new housing, the work must fall under one of the following categories;
- Extensions, major repairs or major redecoration (one or more of the following: walls, pillars, floors, beams, roofs, or stairs) as defined in the Building Standard Law.
- Certain repair or remodel work on the majority of floors, stairs, or walls in the exclusive use areas of condominiums.
- Repair or remodel of the entire floor or wall of a living room, kitchen, bathroom, toilet, washroom, closet, entrance or hallway in the private area of a house or condominium.
- Seismic retrofitting (compliance with current earthquake resistance standards)
- Barrier-free repair work
- Energy-saving repair work
The amount of these construction costs must exceed 1 million yen. Since the amount is determined based on the amount spent for a single construction project, care must be taken if the renovation work is divided into two separate projects.
The conditions for applying for renovation and additions are complex, and there are many more points to pay attention to than when purchasing a new or used home. If you are considering using the mortgage deduction when remodeling your home, it is a good idea to consult with a specialist prior to getting any work done.
Qualify for the mortgage deduction (tax break)
Don’t forget to check the conditions of your loan.
Deductible Mortgage Requirements
To qualify for the mortgage deduction, the following conditions must be met in addition to the aforementioned requirements of having an income of 20 million yen or less and a repayment period of 10 years or more.
The loan must be for the acquisition of a residence for personal use and the purchase of the land (condominium rights to the land) are included in the mortgage.
The borrowing must be from one of the following six sources;
- Agricultural Cooperatives, Credit Unions, and Credit Associations
- Japan Housing Finance Agency
- Local governments
- Various public employee mutual aid associations
- Employers (interest rate of at least 0.2% determined by converting the market interest rate, or at least 1% if the property was used as a residence before December 31, 2016)
However, loans from individuals such as relatives or acquaintances, or loans from a relative’s company or a company in which he/she is a director are not eligible.
Check the relationship with other special exceptions.
Even if the above conditions are met, there are cases where the mortgage deduction cannot be applied due to conflicts with other special provisions.
For example, the housing-related income tax exemptions include the Special Exception for Replacement of Specified Residential Property and the ¥30 million special deduction.
The mortgage deduction cannot be used without income tax to be levied. Since the taxation system for housing is complicated in terms of conditions and procedures, it is advisable to check with a tax accountant or other specialist if you have any questions.
For additional information or any questions please contact us here