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Economy

Japan weighs longer mortgage deduction as tax hike looms

Extra five years among proposals aimed at sustaining housing demand

Homes in Japan's Niigata Prefecture. Japan is considering a longer mortgage tax deduction to offset an upcoming consumption tax hike. (Photo by Hideki Shinohara)

TOKYO -- Japan is considering letting homeowners take a mortgage tax break for up to five more years from the current 10-year plan, Nikkei has learned, in a bid to keep homebuying demand steady after next year's consumption tax hike.

Purchases of new homes are subject to the 8% consumption tax. The rate is slated to rise to 10% in October 2019, which could spark a flurry of demand ahead of the increase, followed by a drop-off afterward.

In an effort to mitigate this, the government is preparing to extend the 10-year mortgage tax break by one to five years.

Currently, homeowners can deduct 1% of their year-end mortgage balance from their income taxes. The maximum amount eligible for the break is 40 million yen ($355,000), meaning that taking the largest possible deduction for a decade would equate to savings of up to 4 million yen. Extending the break to 15 years would permit another 2 million yen in deductions.

Other proposals include raising the mortgage balance cap, possibly to 50 million yen, or lifting the deductible percentage beyond 1%.

The land ministry and the housing industry are not keen on these alternatives. Mortgages in Japan average around 40 million yen, with many in the 20 million yen to 30 million yen range, according to the Japan Federation of Housing Organizations. Increasing the eligible balance would benefit only a limited slice of the population, doing little to bolster demand, the industry group says.

And raising the percentage that can be deducted would be of little use to the many middle- and low-income homeowners whose mortgage deductions already exceed their annual income tax liability.

Extending the length of the break, on the other hand, would be more likely to help homeowners at all income levels. The housing industry is calling for a maximum extension of five years, which a senior industry group official said "could largely make up for the increased burden from the tax hike."

But the Finance Ministry is leery of such a move, contending that the deduction period is already long enough. It favors instead expanding existing cash handouts offered to homebuyers to compensate for higher consumption taxes, or reviving an "eco-points" system rewarding owners of energy-efficient homes.

Extending the mortgage tax break beyond 10 years might be good for homeowners, "but promising benefits down the road will not spur immediate demand," a senior ministry official argued. Raising the mortgage balance cap or the deductible percentage would be easier for consumers to understand, the official said.

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