Tax Reporting for Rental Income: Expense Deductions, Depreciation, Blue Return Deduction, and Business Scale (5 Buildings/10 Rooms)

Those earning rental income from apartments or condominium units must file tax returns listing that income as "real estate income." For salaried employees who own a property for the first time or have inherited rental properties, it can be unclear what qualifies as deductible expenses, how to calculate depreciation, and what changes when filing a blue return (blue form tax return) (青色申告).

This article organizes the calculation method for real estate income, a list of deductible and nondeductible expenses, business scale (based on 5 buildings or 10 rooms), special blue return deductions, and filing deadlines according to information published by the National Tax Agency (Tax Answer, as of April 1, 2026). In the latter half, using Urbalytics rental listings data, we estimate income for one condominium unit and for an apartment building with 10 units.

Key Points of This Article

• Real estate income is calculated as "total revenue minus necessary expenses," including fixed asset tax, fire and earthquake insurance premiums, depreciation, repairs, and loan interest. Loan principal repayments and income taxes or resident taxes cannot be deducted (National Tax Agency, laws as of April 1, 2026).
• The special blue return deduction of 650,000 yen (conditional on e-Tax electronic filing, etc.) applies if the rental operation meets "business scale" standards — roughly 10 or more rental rooms or 5 or more independent buildings. Below that scale, the deduction limit is 100,000 yen.
• For an example of 10 rooms (1K apartments) in Kitasenju (annual rental income approx. 11.29 million yen), the difference between the 650,000 yen and 100,000 yen deduction results in about a 170,000 yen annual tax difference for someone in a roughly 30% tax bracket (Urbalytics data, October 2026).

Calculation Method for Real Estate Income

The amount of real estate income is calculated by the following formula:

Real Estate Income = Total Revenue − Necessary Expenses (− Special Blue Return Deduction)

Total revenue includes rent, common service fees, key money and renewal fees, parking fees, and security or deposit money confirmed as non-refundable. Rent is recognized in the year of the payment date stipulated in the contract. For example, even if December rent is received in January, if the payment date is December, it is recorded in that year.

The calculated real estate income is combined with other income such as salary income to determine income tax. If the real estate income is negative, it can be offset against other income (loss offset), but note that losses attributable to loan interest on land acquisition loans cannot be offset.

List of Deductible and Nondeductible Expenses

Deductible expenses are those directly necessary to earn rental income and clearly distinguishable from personal household expenses. The main items are listed below.

Category	Main Items	Notes
Taxes and Public Dues	Fixed asset tax, city planning tax, real estate acquisition tax, stamp duties	Income tax and resident tax are not deductible
Insurance Premiums	Fire insurance and earthquake insurance premiums	If multiple years are paid in lump sum, only the portion for the current year is deductible
Depreciation	Buildings, building attached equipment (water heaters, air conditioners, etc.)	Land is not depreciable
Repairs	Restoration to original condition, minor repairs	Work that increases value is capital expenditure and must be amortized
Loan Interest	Interest on property purchase loans	Loan principal repayments are not deductible
Management Fees	Management contract fees, condominium management fees and repair reserve fund contributions	Verify that repair reserve fund is non-refundable
Advertising Costs	Advertisement fees (AD), brokerage commissions for tenant recruitment	Brokerage fees paid upon property acquisition are included in acquisition cost
Others	Tax accountant fees, transportation expenses for property visits, communication costs	Only the portion related to rental activity if shared with home use

Source: National Tax Agency Tax Answer No.1370 "When Receiving Real Estate Income (Real Estate Income)" and other laws as of April 1, 2026, compiled by TLL. Please confirm individual matters with your tax office or tax accountant.

The distinction between repair expenses and capital expenditures often varies depending on the amount and nature of the work. Keeping detailed statements for renovations involving equipment replacement can facilitate consultation with your tax accountant.

Depreciation Basics: Useful Life and Calculation for Used Properties

Building purchase costs are not expensed in full the year of purchase but instead depreciated gradually over their useful life. This is depreciation. Buildings are depreciated using the straight-line method; from April 1, 2016 onwards, building equipment and structures are also depreciated using the straight-line method.

The statutory useful life for residential buildings is 22 years for wooden structures, 27 years for steel frames with structural member thickness over 3 mm and up to 4 mm, 34 years for steel frames over 4 mm, and 47 years for reinforced concrete structures. For used buildings, a simplified calculation for remaining useful life is allowed: (Statutory useful life − elapsed years) + (elapsed years × 20%), rounding down fractional years less than 1. The minimum useful life is 2 years if below that. If the total statutory useful life has been exceeded, the useful life is 20% of the statutory useful life.

For example, a 15-year-old wooden apartment’s useful life is (22−15) + 15×20% = 10 years; a 20-year-old reinforced concrete condominium unit’s useful life is (47−20) + 20×20% = 31 years. The shorter the useful life, the higher the annual depreciation expense, but acquisition costs decline faster, potentially increasing capital gains tax on sale. This relationship is detailed in our article on apartment sales tax and depreciation.

Items with acquisition costs under 100,000 yen (including those with usable periods under 1 year) may be expensed fully in that year. Those costing between 100,000 yen and 200,000 yen can opt for spreading the expense evenly over 3 years (special depreciation assets).

Business Scale (5 Buildings/10 Rooms Standard) and the 650,000 Yen Blue Return Deduction

Whether real estate leasing qualifies as "business scale" affects the limits of the special blue return deduction and other benefits. The National Tax Agency states that it is judged by common social standards whether the scale is business-like, and considers rental operations as a business if one of the following applies:

• Rental rooms such as apartments: approximately 10 or more independent rooms available for lease
• Independent houses: approximately 5 or more buildings

Item	Business Scale	Below Business Scale
Special Blue Return Deduction	Up to 550,000 yen (up to 650,000 yen if filing by e-Tax or electronic book storage)	Up to 100,000 yen
Blue Business Owner's Salary (family employee salary)	Applicable	Not applicable
Asset Loss from Demolition or Removal	Fully deductible as necessary expenses	Deductible only up to amount of real estate income before loss deduction
Bad Debt Loss on Rent	Included as necessary expenses in the year rendered uncollectible	Recalculate income retroactively to the year rent was recorded

Source: National Tax Agency Tax Answer No.1373 "Distinction between Business and Other Real Estate Leasing" (laws as of April 1, 2026).

To receive the 650,000 yen deduction, you must keep double-entry bookkeeping records and submit a balance sheet and income statement attached to your tax return filed by the deadline, and file via e-Tax or store accounting books electronically. Generally, the "Application for Approval of Blue Return" must be submitted to the tax office by March 15 of the year you want to apply for (within 2 months if starting business from January 16 onward). For the 2027 tax year (Reiwa 9), the deadline is March 15, 2027.

Revisions from 2027 Tax Year

Due to the 2024 tax reform, from the 2027 tax year onwards, the special blue return deduction will be revised. According to guidance by the National Tax Agency, the maximum deduction will increase to 750,000 yen if certain conditions are met, including double-entry bookkeeping, e-Tax filing, and preparation/storage of high-quality electronic books. However, those who use simplified bookkeeping but meet business scale criteria and have income exceeding 10 million yen in the year before last will no longer be eligible for the 100,000 yen deduction. Those under business scale remain eligible for up to 100,000 yen after revision.