# real estate investment in HI



## moachan

Are real estate investments in, for example Hawaii, profitable, through renting the property (on the tax as well) if you are living working in Japan?


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## larabell

I can't imagine why the profitability of a property in Hawaii would depend on where the owner lives or works. Perhaps I'm not understanding the question...


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## moachan

Thanks for responding and I apologize for the vagueness of the question.

Can you make money from investment rental properties in Hawaii? (As an American living and working in Japan).

For example, when you file your taxes, will the income generated from the rentals be added to your foreign income reported on your 2555-EZ or will it be separate? 

then, If you added Japanese income plus rental income together and subtracted the interest paid on the loan (for 1 year) plus any losses incurred from the rental, 

If the difference between these two figures shows a LOSS!! Will that loss return to you in the form of a REFUND CHECK from the IRS??

Hopefully you can understand it better??

kind regards,
moachan


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## larabell

moachan said:


> For example, when you file your taxes, will the income generated from the rentals be added to your foreign income reported on your 2555-EZ or will it be separate?


I'm not a tax professional but, it seems to me, Form 2555 applies only to earned income and income from real estate is passive income so it's probably not eligible for exclusion. Once you've been in Japan for 5 years, or if the income is remitted to Japan, the rental income will become taxable in Japan and, at that point, you can claim a tax credit on your US return for any tax paid in Japan. Until then your tax credit may be limited since, in theory, you can only claim the credit against taxes on income that was also taxed in Japan.



> If the difference between these two figures shows a LOSS!! Will that loss return to you in the form of a REFUND CHECK from the IRS??


If you expect your "investment" to show a net loss, you may be better off not being able to exclude it because I don't believe the FEIE calculation will go negative so if you have other passive income that isn't subject to FEIE, you may be better off using the loss to offset that income -- but I'm just guessing at your situation. In any case, if you didn't pay anything to the IRS in the first place (as is common with most ex-pats), you're not going to get a refund. Losses in excess of income can be carried over to later years, though.

It sounds like you're looking for a "silver bullet" that will result in free money at the expense of the IRS. Unfortunately, I've never heard of anyone being able to pull that off. The IRS rules for ex-pats are actually stacked against you and it's only getting worse. If the investment in Hawaii would make sense for someone living in the US, it will probably make sense for someone living in Japan. But the taxation issues may be tricky and they're not likely to lean in your favor.

There's a forum on this site specifically dedicated to taxes. It might be worth raising the question there. And if you're talking about a significant chunk of money, you'd be well advised to seek out a tax professional.


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## moachan

Hey guys,

thanks for the very insightful information. I really appreciate it. I have another question. So I'm coming around to the one year anniversary of my home purchase in Hawaii and I've read on other forums that if you don't report income from outside sources to Japanese authorities sometimes they'll not find out? However, If they find out in the future, you might have to pay back what you owe plus penalties. Question 1. Do you know if this is TRUE? If so, is it really worth keeping it a scret? 

Also I paid about $3,000 in FED + STATE taxes last year and haven't reported the rent income to Japanese authorities yet.

Question 2, if the rent income is added to my Japanese income, Will I have to pay taxes in Japan on the rent income when added to my salary? Are you familiar how they calculate that?

Question 3: FOR EXAMPLE, if my combined income (Jap salary + rent income) is $102,800 and $97,600 for 2013 exemption is taken out, the remainder is $5200. Will be taxable income to the IRS? If so, can this HELP me When I file FED and STATE taxes next year as a credit against any taxes that I might have to pay?

kind regards,


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## larabell

If you've been living in Japan for at least 5 years, the income on your investment property is taxable in Japan. If you don't claim it as income and the tax office finds out later, you could be on the hook for back taxes, interest, and penalties. A mistake is one thing and, in my experience, the tax office is pretty good about overlooking mistakes (assuming you don't give them any hassle and you pay up promptly). But if they find you intentionally omitted the data, your problems could be much worse.

That said... if you never remit any of your overseas income to Japan, it's certainly possible the Japanese tax office might never find out. Be aware, though, that various countries have been sharing taxpayer data in an effort to close the cracks so what's usually been the case up to now may not always work out in the future.

Your profile claims you hail from the US. What benefit would you gain by not reporting your income? The US and Japan have an equalization treaty that prevents income from being double-taxed. Presumably, you're not also trying to hide your investment income from the US authorities, too. So just claim the income and also claim the taxes you paid in the US as a credit and they should mostly cancel each other out. Then you don't have to worry about who might find out what.

I'm pretty sure investment income is reported differently from earned income here but, since I don't have a house in Hawaii, I can't say for sure. You really should hook up with a Japanese tax accountant. PM me and I can send you the name and email for my Japanese tax accountant. He's pretty good and doesn't charge an arm and a leg.

The US Earned Income Credit also applies to earned income and not investment income. You can't just lump everything together and subtract $97,600. It's a lot more complex than that. Also, credit for foreign taxes paid is usually applied in the year in which you paid the tax (with certain exceptions). If you wait until a year later, you may not be able to claim the credit (at least not legitimately). I know of a good US-based expat-oriented tax accountant that I can refer you to if you're interested.

The computations involved in a normal expat situation are complicated enough -- your situation with income property is even more complex. There's a separate section of the forum for tax questions that you should check out. And there's usually someone around who can answer most general questions. But it's unfair to ask forum members to do your homework for you and unwise to act on any advice you might receive as a result.

Yes... I think you should report your income in Japan if you've lived here for at least five years. But you need to contact a tax expert to figure out how. And I'd suggest you do it quickly so you don't lose the treaty benefits to which you might otherwise be entitled.


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## moachan

Hi Larabell,

Thanks for the reply and YES I've been in Japan for well over 5 years. I appreciate the information and will try to look for and post this to the tax section of the forum. In the meantime, I'm very interested in contacting your Japanese tax expert as well as your American tax expert (assuming they'Re different persons). 

Would like to pose another question. If the house status was switched from investment to second home would I have to bother with tax issues in Japan?

kind regards,

charlton


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## larabell

moachan said:


> Would like to pose another question. If the house status was switched from investment to second home would I have to bother with tax issues in Japan?


I suppose if that meant that you were no longer renting it out and earning income, it would certainly affect your tax status. If you're still renting it out, I don't know why you think calling it something else would suddenly make the income exempt from taxes. But, with tax law... you never know. That would be something to take up with a tax expert.

The bottom line is that since you've been here over 5 years, the Japanese government wants a cut of your worldwide income. Whether you decide to give them their cut or take your chances that you won't get caught is your decision. How to file in Japan such that you minimize the impact is a matter between you and someone who knows the tax laws.

For what it's worth, I would imagine calling it an "investment" might open up deductions that you can take as a business that you might not be able to take as an individual simply renting out their second home. But it might also make your tax return more complex (ie: different forms for "business" income). But that's just a guess.


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