Selling Real Estate in Japan as a U.S. Resident: Dollar-Based Gain, Depreciation, the Home Sale Exclusion, and Credit for Japanese Tax (2026)

Many Japanese nationals living in the U.S. (green card holders or visa holders who are U.S. tax residents) and many U.S. citizens still own a home or condo in Japan. When you sell, you pay Japanese tax and also report the sale on your U.S. return.

The U.S. figures your gain in dollars, so the result can look very different from the yen numbers. You also need to think about depreciation for any years the property was rented, the $250,000 home sale exclusion, and the foreign tax credit for the Japanese tax.

Both Japan’s home sale relief and the U.S. exclusion have deadlines that start running when you move out. Check both before you list the property.

Key points

• U.S. residents and citizens report gains on Japanese real estate in the U.S. The gain is measured in dollars, so a yen gain can be a dollar loss, and the reverse.
• Japan taxes nonresidents on gains from Japanese real estate. You generally file a Japanese return between February 16 and March 15 of the following year. National tax is 15.315% if you owned the property more than five years as of January 1 of the year of sale, and 30.63% if not.
• Japanese tax on the gain can be claimed as a foreign tax credit on Form 1116. Gain on real property is sourced where the property is located, so it is foreign-source income.
• If the property was your home, you may be able to exclude up to $250,000 of gain ($500,000 for qualifying joint filers) if you owned and lived in it for at least two of the five years before the sale. Depreciation from rental years cannot be excluded.
• If you repay a yen mortgage, check for a foreign currency gain or loss under Section 988.

The Japanese side: nonresidents still file

Nonresidents of Japan are taxed only on Japan-source income, and that includes gains from selling land and buildings in Japan (National Tax Agency, No.2878). If you sell Japanese property at a gain while living in the U.S., you generally file a Japanese return between February 16 and March 15 of the following year, through a tax agent (nozei kanrinin) you register with the tax office (No.1926). See Leaving Japan for a U.S. Assignment: The Japanese Tax Agent, Resident Tax Settlement, Move-Out Notice, and Other Pre-Departure Steps for more on tax agents.

	Long-term	Short-term
Holding period (as of January 1 of the year of sale)	More than 5 years	5 years or less
National income tax	15%	30%
Reconstruction surtax	2.1% of the income tax	2.1% of the income tax
Local inhabitant tax (only if you have a Japanese address on January 1)	5%	9%

Local inhabitant tax is assessed on people with an address in a Japanese municipality on January 1, based on the prior year’s income (Ministry of Internal Affairs and Communications). If you have no address in Japan on January 1 of the year after the sale, there is no inhabitant tax on the gain.

The Japanese gain is the sale price minus acquisition cost and selling expenses, minus any special deduction. The building’s cost is reduced by depreciation for the years you owned it. If you cannot determine the cost, you may use 5% of the sale price instead (No.3208).

A buyer paying a nonresident for land or buildings generally withholds 10.21% of the price, unless the buyer is an individual buying a home for themselves or relatives for ¥100 million or less (No.2884). The withholding is settled on your Japanese return.

If it was your home, Japan offers a special deduction of up to ¥30 million. For a home you no longer live in, one condition is that you sell by December 31 of the year that includes the third anniversary of moving out (No.3302). Confirm with a Japanese tax office or tax accountant whether you qualify, including as a U.S. resident.

The U.S. side: the gain is computed in dollars

Translate the sale price at the exchange rate when you sold, and the purchase price, purchase costs, and later improvements at the rates when you paid them. Your starting point is what you actually paid; your basis is not reset to market value when you became a U.S. resident.

	Purchase	Sale	Yen result	Dollar result
Example A	¥40,000,000 at ¥80 = $500,000	¥48,000,000 at ¥150 = $320,000	¥8,000,000 gain	$180,000 loss
Example B	¥50,000,000 at ¥150 = $333,333	¥45,000,000 at ¥100 = $450,000	¥5,000,000 loss	$116,667 gain

As Example A shows, you can owe Japanese tax and still have a dollar loss, but a loss on personal-use property such as your home is not deductible (Topic 409). As Example B shows, you can have a yen loss and a taxable dollar gain.

Gain on property held more than one year is taxed at 0%, 15%, or 20%, and the part attributable to depreciation (unrecaptured section 1250 gain) at up to 25% (Topic 409). Higher-income taxpayers may also owe the 3.8% Net Investment Income Tax (Topic 559); see The 3.8% Net Investment Income Tax: Who Pays It, What It Covers, and Why Nonresident Aliens Are Exempt.

The form depends on how the property was used: a home goes on Form 8949 and Schedule D (Publication 523); real property used in a trade or business goes on Form 4797; depreciable property held for investment is generally reported on Form 8949 and Schedule D (Form 4797 instructions).

Rental property: depreciation you took, or could have taken

Tangible property used predominantly outside the United States must be depreciated under the Alternative Depreciation System (Publication 946). For a Japanese residential rental building, that means 30 years if placed in service after 2017 and 40 years if placed in service before 2018 (Publication 527). Land is not depreciable.

A home converted to a rental is treated as placed in service on the conversion date, and its basis for depreciation is the lower of your adjusted basis or its fair market value at that time (Publication 527; Treas. Reg. §1.168(i)-4).

Your basis is reduced by the depreciation you deducted or could have deducted (Publication 527). Even if you never claimed depreciation on the Japanese rental, you compute the sale using the reduced basis. See Depreciation Recapture When Selling a US Rental Property: The Extra Tax Owners Often Overlook for how recapture works.

Japan also subtracts depreciation from the building’s cost, but the methods differ, so the two countries’ numbers will not match. Reporting the rental income itself is covered in How Japanese Pension and Real Estate Income are Taxed in the U.S.: A Complete Guide for U.S. Residents.

If it was your home: the $250,000 exclusion (Section 121)

If, during the five years before the sale, you owned the home for at least 24 months and lived in it as your home for at least 24 months, you can exclude up to $250,000 of gain ($500,000 for qualifying married couples filing jointly). You also must not have used the exclusion on another home within the two years before this sale (Publication 523). The statute does not limit the exclusion to U.S. property (26 U.S.C. §121), so a home in Japan can qualify.

• The time after you move out but within the five years before the sale is not “nonqualified use.” So even for a long-time home, selling within three years of moving out keeps you within the two-out-of-five-year test.
• Depreciation allowed or allowable for periods after May 6, 1997 cannot be excluded and is taxable (Publication 523).
• A loss on the sale of your home is not deductible (Topic 409).

Japan’s ¥30 million deduction deadline (December 31 of the year that includes the third anniversary of moving out) and the U.S. two-out-of-five-year test are counted differently. If you want both, plan around whichever deadline comes first. The basics of the U.S. exclusion are also covered in Mastering Capital Gains Tax on US Home Sales: The $250,000 Exclusion Rule Explained.

Foreign tax credit for the Japanese tax

Gain from selling real property is sourced where the property is located (Publication 514), so a gain on Japanese property is foreign-source income. The Japanese national income tax and surtax (and any inhabitant tax) can be claimed on Form 1116. The U.S.–Japan treaty likewise allows Japan to tax gains on real property located there and requires the U.S. to allow a credit for Japanese tax.

• The credit can only reduce U.S. tax on foreign-source income. Gain the U.S. excludes, such as under the home sale exclusion, carries no U.S. tax, so the Japanese tax on that part cannot be used.
• Translate tax at the rate on the date you paid it; withheld tax at the rate on the date it was withheld (Publication 514).
• Unused foreign tax can be carried back one year and forward ten years.
• Each year you choose either the credit or an itemized deduction for all foreign taxes. In most cases the credit is more beneficial (Publication 514).

Paying off a yen mortgage: Section 988

If you financed the property with a yen loan and pay it off when you sell, a currency gain or loss can arise. Becoming the obligor under a debt instrument denominated in a foreign currency is a Section 988 transaction, and Section 988 gain or loss is generally ordinary (26 U.S.C. §988).

Example: you borrow ¥30 million when $1 = ¥100 ($300,000) and repay ¥30 million when $1 = ¥150. In dollars you repaid only $200,000, and the $100,000 difference may be treated as a currency gain.

However, the Section 988 rules do not apply to an individual’s personal transactions. A loan for an investment or rental property can be treated differently from a loan on your own home, so read Unrealized Forex Gains and Section 988: Tax Risks of ‘Phantom Gains’ from Yen Depreciation and Exemption Rules and review your facts.

Worked example

Example: you bought a Tokyo condo in January 2016 for ¥30 million (land ¥12 million, building ¥18 million), lived in it, and moved to the U.S. in January 2024. You rented it out for two years starting February 2024 and sold it in September 2026 for ¥60 million, with ¥2.1 million of selling costs. Assume $1 = ¥120 at purchase and ¥150 at sale, that the value when you started renting was higher than your cost, and that you are a single U.S. tax resident.

U.S. calculation	How	Amount
Sale price	¥60,000,000 ÷ 150	$400,000
Selling costs	¥2,100,000 ÷ 150	−$14,000
Cost	¥30,000,000 ÷ 120	$250,000
Depreciation (simplified)	Building $150,000 ÷ 30 years × 2 years	$10,000
Adjusted basis	$250,000 − $10,000	$240,000
Gain	$386,000 − $240,000	$146,000
Home sale exclusion	Excluding the depreciation	−$136,000
Taxable gain	Depreciation portion (taxed at up to 25%)	$10,000

Japanese calculation	Amount
Sale price	¥60,000,000
Acquisition cost after building depreciation (assumed)	−¥25,000,000
Selling costs	−¥2,100,000
Long-term gain	¥32,900,000
National tax and surtax (no ¥30 million deduction)	¥5,038,635
(Reference) if the ¥30 million deduction applies	¥444,135
Inhabitant tax	None if no Japanese address on January 1 of the next year
Withholding if the buyer is a company (10.21%)	¥6,126,000 (settled on the Japanese return)

In the U.S., $136,000 of the $146,000 gain is excluded, and only the $10,000 of depreciation is taxed. (You lived there from September 2021 to January 2024, which satisfies the two-out-of-five-year test.) The U.S. tax on it, at most $2,500 at 25%, can be offset by the Japanese tax within the Form 1116 limitation. Without the ¥30 million deduction, the Japanese tax is about $33,591 (¥5,038,635 ÷ 150); the part tied to the excluded gain cannot be used.

FAQ

I put the sale proceeds in a Japanese bank account. Do I need to report it?

Foreign real estate you hold directly is not reported on an FBAR or Form 8938, but the Japanese bank account holding the proceeds is (IRS). If your foreign accounts together exceed $10,000 at any time during the year, an FBAR is required. See Form 8938 vs. FBAR (FinCEN Form 114): Thresholds, Covered Assets, Deadlines and Penalties Compared [2026].

What if I inherited the property in Japan?

The U.S. and Japan treat the cost basis of inherited property differently. See Step-Up in Basis at Death: How U.S. Inherited Property Gets a New Cost Basis, and Why Japan Does It Differently.

I had a loss in Japan. Is it a loss in the U.S. too?

Not necessarily, because the U.S. recomputes it in dollars. A loss on your home is not deductible. For a home converted to a rental, if your adjusted basis was higher than the fair market value at conversion, the deductible loss is limited (Publication 544).

What if I am a U.S. citizen living in Japan?

You file a Japanese return as a Japanese resident, and inhabitant tax applies if you have a Japanese address on January 1 of the next year. You also report the sale on your U.S. return as part of your worldwide income and use the foreign tax credit for the Japanese tax (Publication 54).

At CLT NY INC., an IRS Enrolled Agent prepares U.S. returns in English or Japanese for clients who sell property in Japan, including Form 8949, Form 4797, and Form 1116. Contact us.

Related articles

• Unrealized Forex Gains and Section 988: Tax Risks of ‘Phantom Gains’ from Yen Depreciation and Exemption Rules
• Mastering Capital Gains Tax on US Home Sales: The $250,000 Exclusion Rule Explained
• Depreciation Recapture When Selling a US Rental Property: The Extra Tax Owners Often Overlook
• How Japanese Pension and Real Estate Income are Taxed in the U.S.: A Complete Guide for U.S. Residents
• The 3.8% Net Investment Income Tax: Who Pays It, What It Covers, and Why Nonresident Aliens Are Exempt
• Leaving Japan for a U.S. Assignment: The Japanese Tax Agent, Resident Tax Settlement, Move-Out Notice, and Other Pre-Departure Steps

Sources: IRS Publication 54 (2025); IRS: Foreign currency and currency exchange rates; IRS Publication 523 (2025); IRS Publication 527 (2025); IRS Publication 946 (2025); IRS Publication 544 (2025); IRS: Instructions for Form 4797 (2025); IRS Topic No. 409; IRS Topic No. 559; IRS Publication 514 (2025); IRS: Comparison of Form 8938 and FBAR requirements; 26 U.S.C. §121 (govinfo.gov); 26 U.S.C. §988 (govinfo.gov); 26 CFR §1.168(i)-4 (eCFR); U.S.–Japan Income Tax Convention (2003), U.S. Treasury; National Tax Agency No.2878; No.1926; No.1440; No.3208; No.3211; No.3302; No.2884; Ministry of Internal Affairs and Communications: individual inhabitant tax. Information as of October 2026. This article provides general information and is not individual tax advice.