When acquiring a small building under joint ownership, it is rare to acquire it entirely with equity capital. There is inevitably a loan amount involved, and the interest costs on the loan are utilized to reduce income tax by being recognized as necessary business expenses from future rental income. 

However, if these interest expenses are not recognized, they are not acknowledged as expenses for rent, resulting in a significant burden of income tax. Let's delve into the causes of these results and identify the essential precautions to take to prevent unnecessary taxes. Let's find out.

Interest expenses on loans for the acquisition of business assets by a joint owner of a small building are not unconditionally recognized as expenses.

Pursuant to Article 27 (Calculation of Necessary Expenses) of the Income Tax Act and Article 55 (Calculation of Necessary Expenses for Real Estate Rental Income, etc.) of the Enforcement Decree of the same Act, interest on debts incurred in direct relation to a business is recognized as a necessary expense. If a building is purchased under joint ownership and a loan is obtained using the building as collateral, or if a loan is executed for the purpose of purchasing funds and used to acquire the building, such interest qualifies as a necessary expense for real estate rental income. However, not all interest expenses are recognized as expenses for rental income. The important point is that the loan must be for the purpose of the business.

Key Issue: Is it a 'loan for equity investment' or a 'loan for the business'?

The most important point to note regarding joint ventures is the content of the rulings and precedents that continue to be issued recently. As can be seen in the recent ruling (Written Ruling-2025-Income-1948, March 18, 2026), interest on borrowings taken out by a resident for capital contribution is not recognized as an expense, whereas interest paid on borrowings taken out for a joint venture can be included as a necessary expense for the joint venture.  

Then, let's examine the difference between borrowing for capital contribution and borrowing for a joint venture.

Loans for capital contribution (not recognized): If each joint business partner takes out a personal loan to raise their capital contribution, the interest is not considered a necessary expense for the joint business. This is because it is regarded as a personal household expense rather than a debt of the business itself.

Business loan for joint ventures (approved): If, after a joint business entity has been established (e.g., by applying for business registration), a loan is taken out in the name of the joint business partners to acquire or operate a building, which is a business asset, and this is recorded as a liability on the books, it is recognized as a necessary expense.

Practical Judgment Criteria and Provisions (Income Tax Act Enforcement Standard 27-55-18)

According to the enforcement standards of the National Tax Service, loans for capital contributions and loans for financing joint ventures are classified as follows.

Income Tax Act Enforcement Standard 27-55-18 【Treatment of Interest Expense on Borrowings by Joint Partners】 ① Interest on borrowings taken out by joint partners to make a capital contribution shall not be included as necessary expenses. ② Interest on borrowings taken out to raise funds necessary for the management of a joint business shall be included as necessary expenses.

When acquiring a small building, it is essential to specify in the joint business agreement that “the capital contribution shall be [amount], but any shortfall in acquisition funds shall be covered by a loan in the name of the joint business,” execute the loan after registering the joint business, and properly record the loan amount as a business liability in the books (balance sheet).

Precautions at the time of acquisition

When acquiring a building, the acquirer or broker must align the timing of business registration with the timing of loan execution starting from the time of the contract. In particular, the buyer must be encouraged to complete business registration before the final payment (loan execution date).

The point is that a loan to pay the remaining balance must be executed in the capacity of a 'joint rental business operator,' rather than as an 'individual,' in order for the interest to be treated as a deductible expense. In particular, when drafting a joint business agreement, it is necessary to include a clause in the 'special provisions' section that clarifies the nature of the debt. It is important to specify the method of debt assumption and financing in the joint business agreement so that the final debt is secured in the name of the joint business partners.