Consumption Tax Increase: How will it affect buying apartments still under construction?

With the planned increase in consumption tax receiving approval by Parliament last Friday, buyers of as-yet uncompleted apartments may be hit with the higher tax.

According to the tax plan agreed to on August 10, the consumption tax will increase to 8% from April 1, 2014, and 10% from October 1, 2015.

When buying a new apartment, consumption tax is applied to the building portion only, not the land. If the apartment (land excluded) was valued at 20 million Yen, the tax at the current rate of 5% would be 1 million Yen. After the 8% increase, the tax payable at purchase would be 1.6 million Yen.

As a general rule, the consumption tax payable by the buyer is calculated by the tax rate in effect at the time the product is handed over to the buyer. This is of particular concern to buyers of new apartments in buildings that are still under construction and have completion dates in late 2014 and onwards.

For large-scale developments, there are several developers who have started sales now for apartments that will be completed after April 2014, when the tax rate increases. In these cases, there is a chance that buyers who sign purchase contracts now may be hit by the 8% tax when their apartment is ready to hand-over.

So is it too late to buy?

There is a clause in contracts for contracted construction work that states “If the contract is signed at least 6 months prior to an increase in consumption tax, the tax rate applied at the time of hand-over will be the rate in effect at the time the contract was signed”.

For anyone building a house, they have until September 30, 2013 to sign their contract agreements  in order to avoid the higher tax.

What about buying a new apartment? Does the same clause apply?

Technically the clause only applied when placing orders with suppliers, as builders do for a house, and does not appear in a purchase contract when you buy an apartment. However, when the tax rate was increased from 3% to 5% in 1997, there were cases where apartment buyers had chosen customized interiors including doors and walls that were ordered on contract agreements, so the lower tax rate applied to those parts of the apartment. There is a chance that the same system may also apply this time around. In this case, buyers of apartments that are customizable (eg. they can alter the layout and finish of the apartment) will also have until September 30, 2013 to sign the contract agreements and lock in the current tax rate on those upgrades.

Source: Suumo Journal, August 10, 2012.

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