The Supreme Court Ruling and the Significance of Real Estate Appraisal in Inheritance

This article outlines the key points of the noteworthy Supreme Court ruling regarding inheritance tax and discusses the utilization of real estate appraisal in the context of inheritance.

Generally, the assessed value of real estate for inheritance tax purposes tends to be lower than its market value, offering the potential to reduce the amount of inheritance tax payable and making real estate ownership an effective inheritance tax planning strategy. However, a significant shift occurred with the Supreme Court ruling in April 2022, which introduced stricter regulations on holding real estate for the explicit purpose of mitigating inheritance tax. This ruling emphasized the utilization of real estate appraisal valuation as the market value. The article elaborates on what constitutes real estate appraisal valuation as accepted by the ruling and provides insights into cases where taxpayers can leverage real estate appraisal valuation for their advantage.

Supreme Court Precedent Sounds the Alarm on Excessive Inheritance Tax Strategy through Real Estate Ownership (April 2022)

Real estate ownership is commonly seen as a strategy to mitigate inheritance taxes. This is often due to the fact that the assessed value of real estate for inheritance tax purposes is frequently lower than its market value, which represents the prevailing price level in the general market.

However, on April 19, 2022, in a ruling from the Supreme Court's appellate trial, the valuation method asserted by taxpayers for the assessment of typical inheritance assets (where land is evaluated based on inheritance tax official land prices and buildings on fixed asset valuation amounts) was rejected, leading to the taxpayers' defeat being finalized.

The case in question dates back to 2009 when the deceased acquired two rental apartment buildings through loans, and later, in 2012, inheritance occurred. These rental apartments offered significant compression effects on the assessed value for inheritance tax purposes, and the taxpayers had declared zero yen in inheritance tax by calculating based on the typical valuation method for inheritance assets.

According to the ruling, the conventional valuation method for inheritance assets was disregarded in favor of a market valuation through real estate appraisal. As a result of the ruling, a taxation of 240 million yen in inheritance tax was imposed.

This ruling has garnered significant attention in society as it serves as a response from the national tax authorities against blatant inheritance tax reduction strategies involving real estate. Rather than employing the conventional valuation method for typical inheritance assets, the ruling highlights the use of "real estate appraisal valuation" for determining market value.

Basic Principles of Real Estate Appraisal Valuation

As indicated in the aforementioned Supreme Court ruling, the Inheritance Tax Law mandates the valuation of inheritance assets at market value. Results derived from appraisals conducted by real estate appraisers are deemed to possess a certain level of reliability and can be accepted as this market value.

So, what exactly is real estate appraisal valuation? It refers to the determination of the economic value of real estate and the representation of this outcome in terms of a monetary value. Real estate appraisal valuation can only be conducted by certified real estate appraisers, and only individuals holding the title of real estate appraiser are allowed to engage in activities related to this profession.

In the context of real estate valuation (land and buildings), different methods are chosen and applied based on the property's characteristics. The cost approach, which focuses on costs, the sales comparison approach, which focuses on market transactions, and the income approach, which emphasizes earnings, are generally employed. Rather than applying all methods uniformly, suitable methods or a combination of methods are selected based on the property's attributes, allowing for a comprehensive understanding of real estate value.

While the cost approach is generally applicable to real estate of all types, the income approach is utilized for income-generating properties where investment feasibility is crucial. The sales comparison approach is employed when comparable transaction data is available.

Using inheritance tax official land prices or fixed asset valuation amounts can be considered an approach based on the cost perspective. In contrast, real estate appraisal valuation takes into account considerations of cost, market, and income aspects to determine the economic value.

Cases Where Taxpayers Can Utilize Real Estate Appraisal Valuation for Inheritance

While it's common for real estate to have an assessed value for inheritance tax purposes lower than its market value, there are instances where the assessed value can be higher than the market value. For example, in the case of land without road access or land with extreme elevation differences where construction isn't feasible (unbuildable land), the negative aspects of such properties might not be adequately reflected in the inheritance tax assessed value. Additionally, for properties like retail stores, offices, and hotels where value is often determined by income potential, there could be scenarios where the market value derived from real estate appraisal valuation using the income approach is lower due to unique property characteristics or location-related factors.

In situations where holding onto such real estate could lead to an increase in inheritance taxes, it would be preferable to consider selling the property during one's lifetime if possible. However, if inheritance has already occurred, there's a short window of 10 months for completing various tasks such as "property valuation," "tax simulation," "estate division," and "tax payment," in addition to potential property sale. Amidst the rush of tax preparation, hastily selling a property might lead to selling it at an extremely low price, which should be avoided.

To address this, for properties like these, it's recommended to obtain real estate appraisal valuations conducted by certified real estate appraisers in addition to the assessment of inheritance assets by tax professionals. This could serve as a reference for determining an appropriate market value during a potential sale and also offer a second opinion during inheritance tax declaration.

Our company possesses specialized knowledge and networks related to real estate appraisal and brokerage, along with collaboration with firms like Deloitte Tohmatsu Tax Corporation, enabling comprehensive support from experts with insights into accounting, taxation, and more.