The average price of a new condominium in Tokyo’s 23 wards has risen 80 percent over the five-year period through March 2026, according to NHK World reporting published April 21, 2026. For foreign buyers who entered the market in 2021 or 2022, that appreciation is real and measurable. What is less well understood is that the tax treatment of those gains, and of the estate planning structures built around Tokyo property, is about to change in a material way. A reform codified in the 令和8年度税制改正大綱 (FY2026 Tax Reform Outline, published December 19, 2025 by the ruling coalition) introduces a hard 5-year hold-period threshold that reshapes the economics of owning rental real estate in Japan, effective January 1, 2027.

This article explains what the rule change is, which assets it affects, what the quantified impact looks like on a central-Tokyo property, and what strategic options remain for buyers who are structuring acquisitions now.

The 5-Year Rule: What the Reform Actually Says

The reform amends the 財産評価基本通達 (Basic Notification on Property Valuation), the administrative framework that governs how assets are valued for 相続税 (souzoku-zei, inheritance tax) and gift tax purposes. Until January 1, 2027, rental real estate is valued using 路線価 (rosenka, the government-published land price, typically 70–80 percent of market value) for land, and 固定資産税評価額 (kotei-shisan-zei-hyouka-gaku, the fixed-asset tax assessed value, typically 60 percent of construction cost) for the building. On a ¥1 billion central-Tokyo rental property, this can produce an assessed value of ¥400–500 million, compressing the inheritance tax base by 50 percent or more.

From January 1, 2027, that compression is curtailed for properties acquired within five years of the date of death or gift. The new rule applies as follows:

• Rental real estate (貸付用不動産) acquired within 5 years: assessed at approximately 80 percent of acquisition price, regardless of rosenka.
• Rental real estate held more than 5 years: existing rosenka and fixed-asset-tax-based valuation survives intact.
• Fractional real estate products (不動産小口化商品, fudousan-koguchika-shouhin): assessed at full market transaction price, with no hold-period exemption at all.

The practical effect is straightforward. A ¥100 million rental property acquired in 2024 and inherited in 2026 (before the reform’s effective date) could carry an inheritance tax assessed value of roughly ¥40 million, a 60 percent compression. The same property inherited in 2027 or later, within five years of acquisition, would be assessed at approximately ¥80 million, a 20 percent compression. The benefit shrinks by roughly two-thirds.

Why the Reform Happened: The Supreme Court Case and the Predictability Problem

The 5-year rule did not emerge from nowhere. It responds to a documented pattern in which high-net-worth individuals purchased large Tokyo apartment buildings shortly before anticipated death, exploiting the gap between market price and assessed value. The 国税庁 (Kokuzei-cho, National Tax Agency) had a mechanism to challenge the most aggressive cases: 財産評価基本通達6項 (Clause 6 of the Basic Valuation Notification), a catch-all provision allowing the agency to substitute market value when standard assessment produced an outcome deemed abusive.

In a landmark ruling in 2022, the Supreme Court upheld the NTA’s use of Clause 6 in a case involving a ¥3.4 billion Tokyo apartment acquisition made shortly before the owner’s death. The court sided with the agency, but the ruling also exposed a structural problem: taxpayers had no clear advance guidance on when Clause 6 would be triggered. The FY2026 reform replaces that unpredictability with a codified threshold. Five years is the line. Properties on the right side of it retain the existing valuation framework. Properties on the wrong side do not.

For foreign buyers, the lesson is less about the history and more about the forward implication: the 5-year hold period is now a formal planning variable, not a matter of judgment.

Annual Holding Costs: Fixed-Asset Tax Remains Unchanged

The FY2026 reform does not touch the annual cost of ownership. The 固定資産税 (kotei-shisan-zei, fixed-asset tax) framework remains as follows:

• Standard rate: 1.4 percent of the fixed-asset tax assessed value, set under 地方税法第350条 (Local Tax Act, Article 350).
• 都市計画税 (toshi-keikaku-zei, city planning tax): up to 0.3 percent in 市街化区域 (shigaika-kuiki, urbanisation promotion zones), which covers all of central Tokyo.
• Residential land special provision: land of 200 square metres or less is assessed at one-sixth of evaluated value for fixed-asset tax purposes, and one-third for city planning tax.
• Reassessment cycle: every three years. The next reassessment is FY2027.

For a Minato-ku (港区) マンション (manshon, Japanese usage for a freehold condominium) with a fixed-asset tax assessed value of ¥80 million, the annual combined tax burden (1.4 percent plus 0.3 percent) runs to approximately ¥1.36 million before the residential land reduction. With the reduction applied to the land component, the effective annual bill is meaningfully lower. These figures are stable and predictable, which is one reason Tokyo continues to attract long-term holders.

For a detailed walkthrough of the acquisition process that precedes these holding costs, the Japan property purchase timeline for foreign buyers in 2026 covers each stage from initial offer through 登記 (touki, the transfer of legal title recorded at the Legal Affairs Bureau).

What Remains Intact: Three Valuation Discounts That Survive the Reform

For properties held beyond the 5-year threshold, the existing framework continues to offer meaningful tax efficiency. Three mechanisms are particularly relevant for foreign buyers holding central-Tokyo rental assets.

貸家建付地評価減 (Rental Land Discount)

Land under a tenanted building is assessed at a reduced value calculated as: self-use land value multiplied by (1 minus borrowing right ratio multiplied by tenancy right ratio multiplied by occupancy rate). In most Minato-ku and Shibuya-ku (渋谷区) addresses, the 借地権割合 (shakuchi-ken-wariai, borrowing right ratio) is 60 percent (D-zone). The 借家権割合 (shakka-ken-wariai, tenancy right ratio) is 30 percent nationally. At 100 percent occupancy, this produces an 18 percent reduction on the land component. On ¥100 million of land, the assessed value becomes ¥82 million.

小規模宅地等の特例 (Small-Scale Land Special Provision)

Under 租税特別措置法第69条の4 (Special Taxation Measures Act, Article 69-4), rental land of up to 200 square metres qualifies for a 50 percent reduction in assessed value, provided the property has been operated as rental real estate for at least three years prior to the inheritance. This provision survives the FY2026 reform entirely for properties held beyond five years.

Building Discount via Fixed-Asset Tax Assessment

The building component is assessed at its fixed-asset tax evaluated value, which approximates 60 percent of construction cost. A tenanted building is further reduced by the tenancy right: multiplied by (1 minus 30 percent multiplied by occupancy rate). A building with a construction cost of ¥100 million, fully tenanted, carries an inheritance tax assessed value of approximately ¥42 million. That discount is unchanged.

Foreign buyers evaluating the ownership structure for a Nishi-Azabu (西麻布) or Aoyama (青山) property should also review the real estate investment in Japan 2026 tax law and pricing guide for a broader treatment of how individual versus corporate ownership affects the overall tax position.

Non-Resident Exposure and the 2026 Acquisition Window

Foreign nationals face a specific wrinkle in how Japanese inheritance tax applies to them. Those who have resided in Japan for more than 10 of the past 15 years are classified as 無制限納税義務者 (museigen-nouzei-gimusha, unlimited tax obligors) and are subject to Japanese inheritance tax on worldwide assets. Those outside this threshold are taxed only on Japan-sited assets. The 5-year rental property rule applies equally to both categories for Japan-sited property.

For buyers who are currently outside Japan or who have not crossed the 10-of-15-year residency threshold, the Japan-sited asset question is the operative one. A ¥500 million Azabu (麻布) rental property acquired in late 2026 and held beyond January 1, 2032 would fall outside the 5-year window for any inheritance or gift occurring after that date, preserving access to the full rosenka-based valuation framework.

This creates a narrow but real consideration for 2026 acquisitions. Properties acquired before January 1, 2027 are governed by current rules for any inheritance or gift occurring before that date. For estates where a transfer is anticipated within the next two to three years, the timing of acquisition relative to the reform’s effective date is a material variable, not a footnote.

Two asset classes warrant particular caution. Fractional real estate products structured as 信託受益権 (shintaku-jueki-ken, trust beneficiary interests) or 任意組合型 (nin-i-kumiai-gata, anonymous partnership interests) have been widely marketed to HNW individuals as inheritance tax compression vehicles. From January 1, 2027, these are assessed at full market transaction price regardless of hold period. The route is effectively closed for estate planning purposes.

For buyers considering whether freehold or leasehold structures interact differently with these rules, the freehold versus leasehold Japan real estate guide covers the ownership mechanics that determine which valuation framework applies.

Strategic Hold Periods: A Practical Framework for 2026 Buyers

Pulling the regulatory and tax threads together, three acquisition strategies hold up under the post-reform framework.

The first is the long-hold rental strategy. Acquiring a central-Tokyo rental property with a minimum 5-year hold intention preserves the full suite of rosenka discounts, the 貸家建付地 (kashiya-tatchi, rental land) reduction, and the small-scale land special provision. This is the most straightforward path for buyers whose primary motivation is capital preservation combined with rental yield. Tokyo’s rental market has recorded 26 consecutive months of year-on-year growth as of early 2026, according to market data tracked by Arealty, which supports the income-side case for a patient hold.

The second is new construction on land already held beyond five years. The FY2026 reform explicitly excludes land that was not newly acquired from the 5-year rule. A buyer who already holds a central-Tokyo plot and constructs a rental building on it is not subject to the new valuation method for the land component, regardless of when the building is completed. This makes existing land holdings a structurally advantaged base for rental development.

The third is avoidance of fractional products for estate planning. The 不動産小口化商品 route, which offered low minimum entry points and high assessed-value compression, is no longer viable for inheritance or gift tax planning. Buyers who hold these products should review their position with a qualified 税理士 (zeirishi, licensed tax accountant) before January 1, 2027.

For transactions at ¥300 million and above, the interaction between acquisition timing, hold period, ownership structure, and inheritance tax exposure is sufficiently complex that it requires coordinated input from a tax adviser and a licensed property professional from the outset. Koukyuu works exclusively on transactions of ¥300 million and above in neighborhoods including Omotesando (表参道), Azabudai Hills (麻布台ヒルズ), and Kita-Aoyama (北青山), and every engagement is handled personally by a licensed 宅建士 (takken-shi, Japan’s licensed real-estate transaction specialist) from the first consultation through the 重要事項説明 (juuyou-jikou-setsumei, the statutory pre-contract disclosure meeting) and signing, ensuring that tax and structural considerations are embedded in the advisory process rather than surfaced only at closing.

Koukyuu is a private buyer’s advisory for distinguished Tokyo residences in Azabu, Hiroo (広尾), Shirokane (白金), and Nishi-Azabu, focused exclusively on transactions of ¥300 million and above, with a licensed 宅建士 personally handling every stage of the engagement from initial consultation to title transfer. Book a private consultation) to discuss how the 2026 tax reform affects your acquisition strategy.