When to Consider Incorporating Apartment Management? Comparison of Individual and Corporate Tax Rates, Three Methods, and Establishment Costs
When rental income from an apartment increases, you may be advised by tax accountants or financial institutions to "start thinking about incorporation." This is because individual income tax is progressive—tax rates rise as income increases—and beyond a certain income level, holding the property through a corporation may reduce the tax burden.
This article explains the differences in tax rates between individuals and corporations, three methods of incorporation, differences and establishment costs between a limited liability company (合同会社) and a stock company (株式会社), the disadvantages of incorporation, and when to consider it. Since specific judgments vary depending on individual circumstances, consulting a tax accountant is ultimately recommended.
What Changes with Incorporation
Tax Rates: Individual income tax is progressive (5–45%), while corporate tax is relatively flat.
Income Distribution: By appointing family members as officers or employees and paying them appropriate remuneration for their actual duties, income can be distributed.
Expenses: Certain expenses such as officer remuneration, retirement allowances, and part of life insurance premiums can be treated uniquely in a corporation.
Inheritance: Holding properties through a corporation means inheriting shares (ownership interests) in the corporation rather than the real estate itself, making succession arrangements easier to design.
Individual and Corporate Tax Rates
The combined tax rates of individual income tax and resident tax according to taxable income are as follows:
Taxable Income | Income Tax Rate | Combined Rate with Resident Tax |
|---|---|---|
Up to ¥1,950,000 | 5% | 15% |
Over ¥1,950,000 to ¥3,300,000 | 10% | 20% |
Over ¥3,300,000 to ¥6,950,000 | 20% | 30% |
Over ¥6,950,000 to ¥9,000,000 | 23% | 33% |
Over ¥9,000,000 to ¥18,000,000 | 33% | 43% |
Over ¥18,000,000 to ¥40,000,000 | 40% | 50% |
Over ¥40,000,000 | 45% | 55% |
Source: National Tax Agency "Income Tax Rates." Resident tax calculated uniformly at 10%. In addition, a special reconstruction income tax of 2.1% of the income tax amount applies (as of 2026).
Meanwhile, the effective tax rate combining corporate tax, corporate inhabitant tax, and corporate enterprise tax for small and medium-sized corporations is generally in the 20% to low 30% range depending on the scale of income. More people begin to consider incorporation when combined taxable income, including salary income and other income, exceeds ¥9,000,000 and falls into the 43% tax bracket.
Three Methods of Incorporation
Method | Mechanism | Characteristics |
|---|---|---|
Management Outsourcing Method | The property remains individually owned, and management duties are outsourced to the individual's corporation with management fees paid. | Easy to start, but the amount of income transferable is limited to management fees appropriate to the management tasks. |
Sublease Method | The property remains individually owned, and the individual's corporation leases it all at once and subleases it to tenants. | Allows more income transfer to the corporation than the management outsourcing method, but the lease rent must be appropriate. |
Ownership Method | The property itself is owned by the corporation. | All rental income becomes corporate income, resulting in greater effect. Costs are incurred when transferring existing properties. |
If management fees or lease rents are set significantly above or below market prices, there is a risk of tax denial. Set these fees in line with the actual operations and levels of third-party transactions.
Costs When Transferring Existing Properties to a Corporation
In the ownership method, transferring a personally owned property to a corporation constitutes a sale from individual to corporation. The main costs involved are as follows:
Individual side: Capital gains tax on transfer income if there is a gain (for ownership periods over 5 years, taxed as long-term capital gains at 20.315%).
Corporate side: Real estate acquisition tax, registration and license tax for ownership transfer, and judicial scrivener fees.
Loans: If there is an outstanding loan in the individual’s name, refinancing under the corporation or financial institution approval is necessary.
Therefore, a common approach is to purchase new properties under the corporation name while keeping existing properties under individual ownership and combining the management outsourcing method or sublease method.
Differences Between a Limited Liability Company and a Stock Company
Limited Liability Company (合同会社) | Stock Company (株式会社) | |
|---|---|---|
Registration and License Tax | From ¥60,000 | From ¥150,000 |
Articles of Incorporation Authentication | Not required | Required (notary fees ¥30,000–50,000) |
Officers’ Term | None | Exists (for privately held companies, up to 10 years) |
Financial Statement Publication | No obligation | Obligatory |
While a paper article of incorporation requires a revenue stamp of ¥40,000, it is unnecessary if filing an electronic article of incorporation. For asset management corporations, limited liability companies are often chosen because of their lower establishment and operational costs.
Disadvantages and Precautions of Incorporation
Taxes Even in Deficit: The corporate resident tax per capita rate applies annually even if the corporation runs at a deficit (in Tokyo, for corporations with capital up to ¥10 million and up to 50 employees, about ¥70,000 per year).
Tax Accountant Fees and Administrative Burden: Corporate financial statements and tax returns are more complex than individual ones, typically requiring a tax accountant.
Social Insurance: Paying officer remuneration generally requires joining social insurance.
Separation of Funds: Corporate funds are not personal funds. Private expenses cannot be treated as corporate expenses.
Loan Screening: Some financial institutions provide loans based on the representative’s assets and management record even for newly established corporations, but conditions may differ from personal loans.
When to Consider Incorporation
Rental income increases and taxable income falls into a higher tax rate bracket.
There are plans to increase the number of properties in the future.
Family members actually assist in management and can be paid remuneration.
Want to organize property inheritance arrangements in anticipation of inheritance.
Incorporation requires organizing income and expenditure and management records for each property as corporate books. Having a system to receive monthly income and expenditure reports from the management company makes preparing financial statements and loan documents easier.
Summary
Individual income tax is progressive with resident tax combined reaching up to 55%. The effective tax rate for small and medium-sized corporations is about 20% to low 30%.
There are three methods of incorporation: management outsourcing, sublease, and ownership. Choose based on balancing effect and transfer cost.
Transferring existing properties to a corporation incurs capital gains tax and acquisition tax, so buying new properties under the corporation name is also an option.
Asset management corporations are often limited liability companies because of lower establishment and operating costs.
Consider all costs including per capita taxes, tax accountant fees, social insurance, and consult a tax accountant for a simulation before deciding.
About this article
- Author
- Xiao Li（Asset Management）Qualifications: Real Estate Transaction Specialist, Building Management Specialist
The operational lead for real estate sales and property management. At NTT Communications, he spent more than eight years managing DX projects for major enterprises, overseeing the full process from requirements definition through delivery and operations. At TLL, he handles the entire deal management cycle for income-producing properties, including sales strategy planning, investor sourcing, contract execution, settlement, and handover, providing well-matched opportunities and smooth transaction execution for domestic and international investors and operators.
View profile → - Publisher
- TLL合同会社宅地建物取引業 東京都知事(1)第108202号住宅宿泊管理業 国土交通大臣(01)第F03424号
Data in this article cite their source and as-of date. Market conditions and regulations change, so check the latest information and consult a professional before deciding. Translated from the Japanese original.
