Tax season is our least favorite time of the year, and probably yours, too, so we weren’t necessarily inclined to read an article about housing loan income tax deductions that appeared in the Jan. 26 Asahi Shimbun, and not just because we don’t want to be reminded of all the calculations we will have to make and the forms we still have to fill out, but also because we paid off our meager mortgage just a few years ago and so the article has nothing to say to us. But it may have something to say to others.

The article focuses on one particular qualification for a housing loan tax cut, which sounds fairly obvious. You qualify if you bought a residential property to live in and took out a loan to pay for it. The article mentions a realtor who received a phone call from someone who bought a house from them, complaining that they had been refused a tax deduction for their housing loan. As it turned out, the client, who is a salaried employee, had been transferred to another location by his company, and so he decided to rent out the house he bought through the realtor during the indefinite transfer period. The client’s whole family moved with him to his new location. After he submitted the proper form for the housing loan deduction with his tax return, he received a call from the tax office saying that he no longer qualified because he didn’t live in the house for which he took out the loan.

In principle, the deduction covers 0.7 percent of the housing loan balance for a given tax year up to 13 years, a maximum loan amount of ¥50 million, and a maximum tax deduction of ¥4.55 million. The deduction applies to both income tax and local tax, and if the income tax deduction is more than the tax that is actually paid, then the difference is applied to the local tax. 

But as the tax office pointed out to the property owner in question, if the person who took out the housing loan is not living in or on the property for which they took out the loan then the deduction does not apply. A tax accountant told the Asahi that the tax office is very strict about this rule since the central government essentially forfeits ¥1 trillion a year in potential tax revenues because of the housing loan tax deduction. 

In the case mentioned above, the borrower/owner should have reported rental income after deducting expenses, but apparently many people in the same situation neglect to do that. The client in this case was angry that the realtor did not inform him of this rule when he bought the property, but the realtor didn’t know that the client would be transferred so there was no reason to talk about such things. Nevertheless, there are a number of circumstances under which the housing loan tax deduction does not apply, and realtors should be clear about them. In many cases, homeowners who file for housing loan tax deductions who do not live in the homes themselves are breaking the law. The tax accountant says that in all likelihood, if the tax office finds out that someone is renting out a property that they own without reporting the rental income, the tax office will not only cite the owner for claiming a tax deduction they didn’t qualify for, but will charge a penalty on top of the taxes owed for the unclaimed rental income and the loss of the deduction. 

More importantly, if the owner/taxpayer doesn’t inform the lending bank about renting out the property it is a serious problem because housing loan contracts expressly forbid it. A representative of Resona Bank told the Asahi that if they learn that a housing loan customer is renting out their property, they will not only cancel the lower interest afforded to people who take out housing loans, but may in the end cancel the loan and demand that the customer pay off the balance in full. A different bank told the Asahi that it normally confronts about 300 such cases every year. Banks usually find out about the contract violation when they send notices about the loan balance to the addresses and receive no reply. Some banks will then send an employee to the property to check. If they find that someone other than the borrower is living in the residence, they will change the interest rate on the loan, which is usually less than 0.5 percent, to that for a real estate investment loan, which is usually over 2.0 percent; or, as already noted, they may demand the entire balance be paid off.

In addition, the borrower’s credit rating could be seriously undermined. And it makes no difference if the borrower says they were unaware of this rule, because all housing loan contracts include it, albeit most likely in the small print. Many banks are now making sure that borrowers understand this rule when they sign the contract because the problem is not as uncommon as it might sound. But many banks may allow the properties to be rented out if the borrower informs the bank beforehand and gives a clear reason for the rental. Most likely, the owner/borrower mentioned above could have received a waiver from the bank (but not from the tax office) to rent out the property without a change in their interest rate if he could prove to the bank that he has no choice but to move out due to his employment situation. In such cases, the borrower must state that they have the “intention” of moving back sometime in the future. Other “unforeseen circumstances” that a bank might accept for maintaining the loan as it is after the borrower moves out are divorce or caregiving for an elderly relative. And note that it isn’t just people who rent out their properties. You have to actually live in the property to qualify for both the housing loan and the tax deduction. Even if you maintain a legal address somewhere else and just leave the property for which you took out the loan empty, you’re still breaking the law if you file for a housing loan tax deduction.