Japan's 2026 Tax Reform "5-Year Rule" Restricts Rental Property Inheritance Tax Planning — What to Check Before January 2027

Japan's FY2026 (Reiwa 8) tax reform introduces a significant restriction on using rental real estate for inheritance tax reduction. Under the new rule, rental properties acquired within 5 years before the date of death will be assessed at 80% of their market value for inheritance tax purposes — rather than the much lower assessed values under the current roadside land price (路線価) or fixed-asset tax valuation system. The change takes effect for inheritances occurring on or after January 1, 2027.

Background — Why Is the "Apartment Tax Saving Scheme" Being Restricted?

For decades, purchasing rental real estate — particularly urban condominiums — has been a popular inheritance tax reduction strategy in Japan. The roadside land price (路線価) assessment of a property is typically only 30–40% of its actual market value, meaning a ¥200 million apartment might be assessed at ¥60–80 million for tax purposes. When financed with a mortgage, the debt further reduces the taxable estate.

The National Tax Agency addressed so-called "mansion tax-saving schemes" starting January 2024 by revising condominium valuation rules (strata-title properties), but the reform left detached rental houses and single-building apartments largely untouched. The new FY2026 reform is a broader response, applying to virtually all rental real estate acquired within 5 years of death.

The "5-Year Rule" in Detail

What properties are affected?

The rule applies to rental real estate (apartments, condominiums, rental houses, commercial buildings, etc.) that the deceased — or their spouse or closely related company — acquired or newly constructed through an arm's-length transaction within 5 years before the date of death.

New valuation method

The property will be assessed at an amount equivalent to its current market transaction value. In practice, this means no less than 80% of an amount derived from the acquisition price adjusted for land value changes. To illustrate: a property with a market value of ¥200 million will be assessed at a minimum of ¥160 million — compared to perhaps ¥60–80 million under the current roadside land price method.

Who Is Not Affected?

The new rule only applies to properties acquired within 5 years of death. The following cases are unaffected:

• Rental properties held for more than 5 years prior to the date of death
• Owner-occupied residential properties (self-use land and buildings)
• Properties inherited or received as a gift (i.e., acquired without consideration — arm's-length purchase requirement is not met)

Additionally, transitional provisions are expected for properties where construction was already underway as of the effective date and the land had been owned for more than 5 years.

3 Points to Review Before the Rule Takes Effect

① Check when existing rental properties were acquired

Review the acquisition dates of all rental properties held by elderly family members. Any property acquired on or after January 1, 2022 will still be within the 5-year window on January 1, 2027 (the effective date) and will be subject to the new valuation rule.

② Update your inheritance tax estimates

If you have previously had inheritance tax calculations prepared by a tax advisor based on roadside land price valuations, those estimates may be significantly understated for recently acquired rental properties. We recommend consulting a qualified tax professional or administrative scrivener to update the calculations.

③ Consider lifetime gift transfer strategies

Transferring rental properties to children or grandchildren through lifetime gifts (before the 5-year window runs) remains a valid strategy — provided the property has been held for over 5 years before the gift. However, similar valuation rules may apply to gift tax in some circumstances, so professional advice is strongly recommended before acting.