Act on Special Measures Concerning Taxation

Where there is an amount of loss on the transfer of residential property that has arisen in the calculation of the amount of capital gains of an individual for 2004 or any subsequent year, notwithstanding the provisions of the second sentence of Article 31, paragraph (1) and paragraph (3), item (ii), the provisions of Article 69, paragraph (1) of the Income Tax Act and other provisions of laws and regulations concerning income tax apply to that amount of loss on the transfer of residential property; provided, however, that this does not apply if the individual has received the application of the provisions of this paragraph with respect to an amount of loss on the transfer of residential property, other than that amount of loss on the transfer of residential property, that arose in any year within the three years preceding that year.

The provisions of the preceding paragraph apply only if the tax return for the year for which the individual seeks the application of the provisions of that paragraph contains a statement to the effect that the individual seeks the application of the provisions of that paragraph, and has attached to it a written statement concerning the calculation of the amount of loss on the transfer of residential property and other documents specified by Order of the Ministry of Finance.

Even if the tax return referred to in the preceding paragraph is not filed, or a tax return is filed without the statement or document referred to in that paragraph, the district director may apply paragraph (1) if the district director finds that there were unavoidable circumstances for the failure to file the return or to include the statement or document, but only if a document giving that statement and the document prescribed by Order of the Ministry of Finance referred to in that paragraph are submitted.

Where an individual who files a tax return has an amount of loss on transfer after aggregation that arose in any year within the three years preceding that year (excluding any amount deducted in a year before that year by applying the provisions of this paragraph), if the individual has, as of December 31 of that year (or, for the year that includes the date of the individual's death, as of that date of death), an amount of housing loans, etc. pertaining to the replacement asset (meaning a replacement asset prescribed in paragraph (7), item (i)) pertaining to that amount of loss on transfer after aggregation, then, notwithstanding the provisions of the second sentence of Article 31, paragraph (1), an amount equivalent to that amount of loss on transfer after aggregation is deducted, pursuant to the provisions of Cabinet Order, in the calculation of the amount of long-term capital gains prescribed in that paragraph, the amount of short-term capital gains prescribed in Article 32, paragraph (1), the amount of gross income, the amount of retirement income or the amount of timber income for the year to which the tax return pertains; provided, however, that this does not apply to a year in which the individual's total income prescribed in Article 2, paragraph (1), item (xxx) of the Income Tax Act for that year, pertaining to the individual's income tax for that year, exceeds 30,000,000 yen.

The provisions of the preceding paragraph apply only if the individual has filed the tax return referred to in paragraph (2) by its filing deadline for the income tax for the year in which the amount of loss on the transfer of residential property arose and has subsequently filed tax returns consecutively, and the tax return referred to in the preceding paragraph has attached to it a written statement concerning the calculation of the amount to be deducted under the provisions of that paragraph and other documents specified by Order of the Ministry of Finance.

The provisions of paragraph (3) apply mutatis mutandis where, in the case of applying the provisions of paragraph (4), no tax return is filed by the filing deadline referred to in the preceding paragraph, or a tax return is filed without the documents referred to in that paragraph attached.

In this Article, the meanings of the terms listed in the following items are as prescribed respectively in those items:

amount of loss on the transfer of residential property: In the case where the individual has made, within the period from January 1, 1998 to December 31, 2027 (referred to as the "application period" in the following paragraph), a transfer (including the lending of real property, etc. giving rise to capital gains prescribed in Article 31, paragraph (1), and excluding a transfer to the individual's spouse or any other person who has a special relationship with the individual specified by Cabinet Order, and any other transfer specified by Cabinet Order; hereinafter referred to in this item and the following paragraph as a "specified transfer") of any of the following, being a house, or land or a right existing on land, held by the individual whose holding period prescribed in paragraph (2) of that Article exceeds five years as of January 1 of that year (hereinafter referred to in this paragraph and the following paragraph as a "transferred asset") (excluding the case where the individual has received the application of the provisions of Article 31-3, paragraph (1), Article 35, paragraph (1) (excluding where it is applied pursuant to the provisions of paragraph (3) of that Article), Article 36-2 or Article 36-5 with respect to a transfer of assets in the year preceding that year or the year before that, or where the individual receives or has received the application of the provisions of paragraph (1) of the following Article with respect to a transfer of assets in that year or within the three years preceding that year), if, during the period from January 1, 1998 (or, where the date of the specified transfer is on or after January 1, 2000, January 1 of the year preceding the year that includes the date of the specified transfer) to December 31 of the year following the year that includes the date of the specified transfer (or, where it has become difficult, due to unavoidable circumstances attributable to an extraordinary disaster designated as a specified extraordinary disaster pursuant to the provisions of Article 2, paragraph (1) of the Act on Special Measures concerning Preservation of Rights and Interests of Victims of Specified Disaster, for the individual to make, by that date, an acquisition (including construction, and excluding an acquisition by gift and any other acquisition specified by Cabinet Order; the same applies hereinafter in this paragraph, paragraph (13) and paragraph (14)) of a house used as the individual's residence that is specified by Cabinet Order, or land or a right existing on land used as the site of that house, located in Japan (hereinafter referred to in this paragraph, paragraph (13) and paragraph (14) as a "replacement asset"), and the individual is expected to acquire a replacement asset within two years after that date and has obtained the approval of the district director having jurisdiction over the place for tax payment pursuant to the provisions of Order of the Ministry of Finance, December 31 of the second year following the year that includes that date; referred to as the "acquisition deadline" in paragraph (13)), the individual acquires a replacement asset and has an amount of housing loans, etc. pertaining to the replacement asset as of December 31 of the year that includes the date of the acquisition, and has used the replacement asset as the individual's residence, or is expected to do so, during the period from the date of the acquisition to December 31 of the year following the year that includes the date of the acquisition, the amount calculated pursuant to the provisions of Cabinet Order as the portion of the amount of losses that arose in the calculation of the amount of capital gains from the specified transfer of the transferred asset (or, where there are two or more such specified transfers in that year, limited to one specified transfer selected by the individual pursuant to the provisions of Cabinet Order) that cannot be fully deducted even after being deducted in the calculation of the amount of long-term capital gains prescribed in Article 31, paragraph (1) and the amount of short-term capital gains prescribed in Article 32, paragraph (1) for the year that includes the date of the specified transfer;

a house used by the individual as the individual's residence that is specified by Cabinet Order and located in Japan;

a house listed in (a) that has ceased to be used as the individual's residence (limited to one transferred during the period from the day on which it ceased to be used as the individual's residence to December 31 of the year that includes the day on which three years have elapsed from that day);

a house listed in (a) or (b) and land used as the site of the house or a right existing on that land;

where the individual's house listed in (a) has been destroyed by a disaster, land, or a right existing on that land, that was used as the site of the house and whose holding period prescribed in Article 31, paragraph (2) would exceed five years as of January 1 of that year if the individual had continued to own the house (limited to land or a right transferred during the period from the day on which the disaster occurred to December 31 of the year that includes the day on which three years have elapsed from that day).

net loss: A net loss prescribed in Article 2, paragraph (1), item (xxv) of the Income Tax Act;

amount of loss on transfer after aggregation: Of the net loss that arose for the individual in that year, the amount calculated pursuant to the provisions of Cabinet Order as the portion pertaining to the amount of loss on the transfer of residential property (where the transferred assets pertaining to that amount of loss on the transfer of residential property include land or a right existing on land whose area specified by Cabinet Order exceeds 500 square meters, excluding the amount corresponding to the portion of that land or right existing on land in excess of 500 square meters);

housing loans, etc.: Loans borrowed from a financial institution prescribed in Article 8, paragraph (1) or from the Japan Housing Finance Agency to fund the new construction or acquisition of a house used as a dwelling or the acquisition of land or a right existing on land used as the site of that house (hereinafter referred to in this item as "housing acquisition, etc."), which are to be repaid under the contract in installments over a repayment period of 10 years or more, and other loans or debts pertaining to housing acquisition, etc. (excluding those corresponding to interest) that are specified by Cabinet Order.

With regard to the application of the provisions of Article 70, paragraph (1) of the Income Tax Act (including where the calculation is made in accordance therewith pursuant to the provisions of Article 165, paragraph (1) of that Act) in the case where the net loss that arose in each year prescribed in Article 70, paragraph (1) of that Act for an individual who files a tax return includes an amount of specified net loss (meaning the amount calculated pursuant to the provisions of Cabinet Order as the net loss pertaining to the amount of losses that arose in the calculation of the amount of capital gains from a specified transfer of a transferred asset made within the application period; the same applies in the following paragraph and paragraph (10)), the phrase "and Article 142, paragraph (2)" in Article 70, paragraph (1) of that Act is deemed to be replaced with ", Article 142, paragraph (2)", and the phrase "that has become the basis" is deemed to be replaced with "that has become the basis, and the amount of specified net loss prescribed in Article 41-5, paragraph (8) of the Act on Special Measures Concerning Taxation (Aggregation of Profits and Losses and Deduction for Carryover of Losses on Transfer in the Case of Replacement, etc. of Residential Property)".

With regard to the application of the provisions of Article 140, paragraph (1) or Article 141, paragraph (1) of the Income Tax Act (including where these provisions are applied mutatis mutandis pursuant to Article 166 of that Act) in the case where the net loss that arose in that year for an individual who files a tax return includes an amount of specified net loss, the phrase "net loss that arose" in Article 140, paragraph (1) or Article 141, paragraph (1) of that Act is deemed to be replaced with "net loss that arose (excluding the amount of specified net loss prescribed in Article 41-5, paragraph (9) of the Act on Special Measures Concerning Taxation (Aggregation of Profits and Losses and Deduction for Carryover of Losses on Transfer in the Case of Replacement, etc. of Residential Property))".

Where a fact prescribed in Article 140, paragraph (5) of the Income Tax Act has occurred with respect to the individual or the individual has died, if the net loss that arose in the year preceding the year that includes the day on which the fact occurred or the day of death includes an amount of specified net loss, then, with regard to the application of the provisions of that paragraph or Article 141, paragraph (4) of that Act (including where these provisions are applied mutatis mutandis pursuant to Article 166 of that Act), the phrase "and Article 142, paragraph (2)" in Article 140, paragraph (5) of that Act is deemed to be replaced with ", Article 142, paragraph (2)", and the phrase "that has become the basis" is deemed to be replaced with "that has become the basis, and the amount of specified net loss prescribed in Article 41-5, paragraph (10) of the Act on Special Measures Concerning Taxation (Aggregation of Profits and Losses and Deduction for Carryover of Losses on Transfer in the Case of Replacement, etc. of Residential Property)", and the phrase "and paragraph (2) of the following Article" in Article 141, paragraph (4) of that Act is deemed to be replaced with ", paragraph (2) of the following Article", and the phrase "that has become the basis" is deemed to be replaced with "that has become the basis, and the amount of specified net loss prescribed in Article 41-5, paragraph (10) of the Act on Special Measures Concerning Taxation (Aggregation of Profits and Losses and Deduction for Carryover of Losses on Transfer in the Case of Replacement, etc. of Residential Property)".

Necessary matters concerning the application of the provisions of paragraph (1), paragraph (4) and the preceding three paragraphs are specified by Cabinet Order.

Where the provisions of paragraph (4) apply, the following applies:

with regard to the application of the provisions of Article 2, paragraph (1), items (xxx) through (xxxiv)-5 of the Income Tax Act, the phrase "Article 70 (Deduction for Carryover of Net Loss) and Article 71 (Deduction for Carryover of Casualty Loss)" in item (xxx) of that paragraph is deemed to be replaced with "Article 70 (Deduction for Carryover of Net Loss) and Article 71 (Deduction for Carryover of Casualty Loss), and Article 41-5 of the Act on Special Measures Concerning Taxation (Deduction for Carryover of Losses on Transfer in the Case of Replacement, etc. of Residential Property)";

with regard to the application of the provisions of Article 22 of the Income Tax Act, the phrase "or Article 71, paragraph (1) (Deduction for Carryover of Casualty Loss)" in paragraph (2) of that Article is deemed to be replaced with ", Article 71, paragraph (1) (Deduction for Carryover of Casualty Loss) or Article 41-5, paragraph (4) of the Act on Special Measures Concerning Taxation (Deduction for Carryover of Losses on Transfer in the Case of Replacement, etc. of Residential Property)", and the phrase "or Article 71" in paragraph (3) of that Article is deemed to be replaced with "or Article 71, or Article 41-5 of the Act on Special Measures Concerning Taxation";

with regard to the application of the provisions of Article 123 of the Income Tax Act, the phrase "Article 71, paragraph (1) (Deduction for Carryover of Casualty Loss)" in paragraph (1) of that Article is deemed to be replaced with "Article 71, paragraph (1) (Deduction for Carryover of Casualty Loss) or Article 41-5, paragraph (4) of the Act on Special Measures Concerning Taxation (Deduction for Carryover of Losses on Transfer in the Case of Replacement, etc. of Residential Property)", the phrase "or Article 71, paragraph (1)" in that paragraph is deemed to be replaced with "or Article 71, paragraph (1), or Article 41-5, paragraph (4) of the Act on Special Measures Concerning Taxation", and the phrase "or Article 71, paragraph (1)" in paragraph (2), item (v) of that Article is deemed to be replaced with "or Article 71, paragraph (1), or Article 41-5, paragraph (4) of the Act on Special Measures Concerning Taxation";

with regard to the application of the provisions of the Act on General Rules for National Taxes, the phrase "that Act" in Article 2, item (vi), (c), 1. of that Act is deemed to be replaced with "that Act or the Act on Special Measures Concerning Taxation";

beyond what is specified in the preceding items, necessary matters concerning the application of the provisions of laws and regulations concerning income tax in the case where the provisions of paragraph (4) apply are specified by Cabinet Order.

If a person who has received the application of the provisions of paragraph (1) does not acquire a replacement asset by the acquisition deadline, does not have an amount of housing loans, etc. pertaining to the replacement asset as of December 31 of the year that includes the date of acquisition of the replacement asset, or does not use the replacement asset as the person's residence by December 31 of the year following the year that includes the date of acquisition of the replacement asset, the person must file an amended return form for the income tax for the year for which the person received the application of the provisions of that paragraph by the day on which four months have elapsed from the acquisition deadline or that date, and must pay, within that time limit, the amount of tax to be paid as a result of filing the amended return form.

If a person who has received the application of the provisions of paragraph (4) does not use the replacement asset as the person's residence by December 31 of the year following the year that includes the date of acquisition of the replacement asset, the person must file an amended return form for the income tax for the year for which the person received the application of the provisions of that paragraph by the day on which four months have elapsed from that date, and must pay, within that time limit, the amount of tax to be paid as a result of filing the amended return form.

In the case falling under the provisions of the preceding two paragraphs, if an amended return form under those provisions is not filed, the district director having jurisdiction over the place for tax payment is to make a reassessment under the provisions of Article 24 or Article 26 of the Act on General Rules for National Taxes with regard to the amount of income, the amount of income tax and other matters that should have been stated in the amended return form.

With regard to the application of the provisions of the Act on General Rules for National Taxes to an amended return form under the provisions of paragraph (13) or paragraph (14) and to the reassessment referred to in the preceding paragraph, the following applies:

an amended return form filed within the filing deadline prescribed in paragraph (13) or paragraph (14) is deemed to be a return filed by the due date prescribed in Article 17, paragraph (2) of the Act on General Rules for National Taxes, except where the provisions of Article 20 of that Act are applied;

with regard to an amended return form filed after the filing deadline prescribed in paragraph (13) or paragraph (14) and to the reassessment, the phrases "statutory tax return due date" and "statutory payment due date" in the provisions of Chapter II through Chapter VII of the Act on General Rules for National Taxes are deemed to be replaced with "filing deadline for the amended return form prescribed in Article 41-5, paragraph (13) or paragraph (14) of the Act on Special Measures Concerning Taxation", the phrase "return filed by the due date" in Article 61, paragraph (1), item (i) of that Act is deemed to be replaced with "tax return prescribed in Article 2, paragraph (1), item (x) of the Act on Special Measures Concerning Taxation", the phrase "return filed by the due date or return filed after the due date" in paragraph (2) of that Article is deemed to be replaced with "amended return form under the provisions of Article 41-5, paragraph (13) or paragraph (14) of the Act on Special Measures Concerning Taxation", and the phrase "return filed by the due date" in Article 65, paragraph (1), paragraph (3), item (ii) and paragraph (5), item (ii) of that Act is deemed to be replaced with "tax return prescribed in Article 2, paragraph (1), item (x) of the Act on Special Measures Concerning Taxation";

the provisions of Article 61, paragraph (1), item (ii) and Article 66 of the Act on General Rules for National Taxes do not apply to the amended return form and the reassessment prescribed in the preceding item.