We are Murata Tax Accounting Office, a firm based in Miyakojima Ward, Osaka City, specializing in inheritance and international taxation.

Today, we would like to explain the tax treatment when selling real estate located in Hawaii, using a Q&A format.

 
Q. Question

I am a Japanese national residing in Japan. I sold real estate that I owned in Hawaii, and U.S. federal and state taxes were withheld at source.

It is expected that a portion of these withheld taxes will be refunded when I file my U.S. tax return in the following year.

In this case, is it possible to make an adjustment in my Japanese tax return to avoid double taxation with respect to the taxes withheld in the United States?

 
A. Answer

1. Taxation in Japan
Individuals who hold Japanese nationality and reside in Japan are subject to income tax not only on income sourced in Japan but also on their worldwide income.

Accordingly, any capital gain arising from the sale of real estate in Hawaii must also be reported and taxed in Japan.

 
2. Taxation in the United States and Foreign Tax Credit
When real estate located in Hawaii is sold, it is also subject to withholding tax in both the United States (federal) and the State of Hawaii.

As a result, double taxation arises in both Japan and the United States. To eliminate this double taxation, a foreign tax credit may be claimed in Japan, which is the country of residence.

The available methods are as follows:

(1) Claim the foreign tax credit in the Japanese tax return for the year in which the withholding tax was imposed.

(2) Do not claim the credit in that year, but instead apply the foreign tax credit in the year when the U.S. tax return is filed (in accordance with Basic Circular 95-3).

In principle, method (1) is the standard approach; however, method (2) is also permitted.

Since the overall tax burden may differ depending on which method is chosen, careful consideration is required.

 
In this article, we have outlined the tax treatment based on the example of selling real estate in Hawaii.

If you have similar inquiries, please feel free to contact us through our inquiry form.