Depreciation & After-tax Cash Flow (Japan)

1. Statutory useful life

• Wood (木造): 22 years
• Light-gauge steel < 3mm: 19 years
• Light-gauge steel 3–4mm: 27 years
• Heavy steel (S造): 34 years
• Reinforced concrete (RC / SRC): 47 years

2. The used-property short schedule

For property older than the statutory life, use statutory life × 20% (rounded down, min 2 years). A 30-year-old wooden house depreciates over just 4 years — a huge annual deduction on a modest purchase.

22-year-old wooden house, ¥15M building portion:
Remaining life = (22 - 22) + 22 × 20% = 4 years
Annual depreciation = ¥15,000,000 ÷ 4 = ¥3,750,000/yr

3. Land vs building split

You only depreciate the building. On acquisition, split price using: property-tax assessment ratios, construction-cost method, or contract allocation. Higher building ratio = more depreciation = lower taxable income. Japan tax office scrutinises aggressive allocations, so stay defensible.

4. Effect on after-tax cash flow

Deprecation is non-cash. It reduces taxable income without touching bank balance. On a deal with ¥1M NOI and ¥3M depreciation, taxable income is −¥2M — you carry a loss and take the ¥1M as tax-free cash.

5. Sale-side reversal

Depreciation lowers your basis, so when you sell, capital gain is larger by the same amount. Effective rate: 20.315% long-term vs 39.63% short-term (≤ 5 years). The play is: high income shelter → hold > 5 years → pay long-term rate on exit.

Model both sides together — the exit-strategy guide shows the full 10-year picture.