Compensatory division — dividing inherited real estate without selling: how to set the valuation, and is a sale needed?

In short: where one heir takes the inherited property, such as the family home, without selling it, and pays the others cash to settle up, that is compensatory division. The key points are three — the taker can keep the property without selling if they can raise the compensation; the amount is agreed among the heirs and is usually set on the market value of the property; and the computation of the inheritance-tax base may require adjustment against the inheritance-tax valuation (National Tax Agency Q&A No. 4173). If the valuation becomes a point of dispute it goes to a real estate appraiser, the tax to a tax accountant, and the inheritance registration to a judicial scrivener. We handle the valuation and market appraisal of the property and, where a sale becomes necessary, the brokerage.

This article is for heirs who want to keep the inherited property and settle up with compensation. It sets out how to decide the valuation of the property and whether a sale is needed, from the Civil Code, the Income Tax Act and the Real Property Registration Act, and from National Tax Agency material. The specific tax and valuation figures and the legal judgment of division are left to qualified professionals such as tax accountants, real estate appraisers and lawyers.

What is the difference between compensatory division and conversion division?

There are three broad ways to divide an estate. Article 906 of the Civil Code provides that division of an estate is made "having regard to the kind and nature of the property and rights belonging to the estate, the age, occupation, physical and mental condition and living circumstances of each heir, and all other circumstances." Which type to take is chosen by the heirs within that regard, and if agreement is not reached, division is requested of the family court (Civil Code Article 907).

Type of division	Content	When it fits
Division in kind	Real estate and deposits are allotted to each heir in their existing form	When there are several easily divided assets
Compensatory division	One heir takes the real estate and pays the others compensation (cash)	When you want to keep the property or keep living there
Conversion division	The real estate is sold, turned into cash, and the proceeds are split by share	When it is hard to divide in kind and no one needs to keep it

National Tax Agency Q&A No. 4173 explains compensatory division as "one or several of the co-heirs taking the estate property in kind, and the one who takes it in kind bearing a debt to the other co-heirs." That is, the property itself is taken by one heir, who bears "a debt to pay compensation" to the others. The difference from conversion division, where the proceeds of a sale are divided, lies in whether the property can be kept. The flow of selling real estate by conversion division and dividing the proceeds is set out at selling inherited real estate by conversion division.

How much is the compensation? On what basis is the property valued?

What is most likely to cause friction in compensatory division is the amount of the compensation. The amount is agreed among the heirs, but the "value put on the property" that underpins it changes the compensation greatly.

Real estate has several yardsticks for valuation. The market value close to actual sale prices (market value / appraisal), the inheritance-tax valuation used to compute inheritance tax (roadside land price, etc.), the fixed-asset-tax valuation, and the officially announced land price all give different figures for the same property. In agreeing the compensation, because the other heirs receive in cash "the share they would otherwise have received," the market value is often taken as the basis. On the other hand, in computing the inheritance-tax base, the amount of the compensation may be adjusted to the inheritance-tax valuation. National Tax Agency Q&A No. 4173 shows that where the amount of the compensation property is set on the basis of the market value of the property that is the object of the compensatory division, it is adjusted as follows.

Position	Inheritance-tax base
The one paying compensation (taker in kind)	Inheritance-tax valuation of the property in kind − (compensation debt × inheritance-tax valuation ÷ market value at the time of compensatory division)
The one receiving compensation	Compensation debt × inheritance-tax valuation ÷ market value at the time of compensatory division

In the example of No. 4173, where cash of ¥20 million is paid instead of taking land with an inheritance-tax valuation of ¥40 million and a market value of ¥50 million, the taker's tax base is ¥40 million − {¥20 million × (¥40 million ÷ ¥50 million)} = ¥24 million, and the recipient's tax base is ¥20 million × (¥40 million ÷ ¥50 million) = ¥16 million. The key is that the agreed compensation (on a market-value basis) and the inheritance-tax base (on a valuation basis) are different things. Where the valuation itself is a point of dispute, an appraisal by a real estate appraiser under the real estate appraisal standards set by the Ministry of Land, Infrastructure, Transport and Tourism may be used. What we can provide is a market-value appraisal based on transaction cases. The computation of the inheritance-tax base goes to a tax accountant, and the appraisal of a disputed valuation to a real estate appraiser, each engaged directly.

With compensatory division, can the inherited property be kept without selling?

If you can raise the compensation, compensatory division lets you keep the property. But "not selling" does not mean "no procedure is needed."

First, real estate cannot be left in the deceased's name. Inheritance registration into the name of the heir who takes it by compensatory division is required. Inheritance registration has been mandatory since 1 April 2024 (Reiwa 6); Article 76-2 of the Real Property Registration Act requires the application within three years of learning that you have acquired real estate by inheritance, and neglecting it without good reason is subject to an administrative fine of up to ¥100,000. It cannot be skipped even when you do not sell. Next, note the case where the compensation is paid not in "cash" but with "another property (in kind) held by the taker." National Tax Agency Q&A No. 4173 shows that where an heir's own property is delivered as the compensation property, the one who delivered it is treated as having transferred that asset at the market value at the time of performance, and income tax (capital gains) applies. Paying in cash produces no capital gains, but paying with another property can — that is the fork.

Point to check	Treatment in compensatory division	Refer to
Title	Inheritance registration into the taker's name (Real Property Registration Act Art. 76-2, within three years)	Registration = judicial scrivener
Paying compensation in cash	No capital gains (the inheritance-tax base is adjusted under No. 4173)	Tax = tax accountant
Paying compensation with another property	Treated as a transfer at the market value at performance; income tax may apply	Tax = tax accountant
When selling in future	Acquisition cost and date are carried over from the deceased (Income Tax Act Art. 60)	Tax = tax accountant

The whole picture of keeping or dividing inherited real estate is at inheritance and real estate consultation. The estate-division agreement is handled by an administrative scrivener, inheritance registration by a judicial scrivener, and the tax computation by a tax accountant.

What are the options when the compensation cannot be raised?

The weakness of compensatory division is that the taker must raise a lump sum of cash. When it cannot be raised, rather than forcing compensatory division, compare the following options.

One is paying the compensation in installments. This is paying in installments with the timing and amounts stated in the agreement, but because arrears easily lead to disputes among heirs, how the terms are written is key. A second is borrowing from a financial institution, borrowing the source of the compensation and paying it in a lump sum. A third is payment in kind (paying with another property, etc.), but as noted above, capital gains may apply. If it is still hard to raise, switch to conversion division — selling the property and dividing the cash — or to co-ownership division, inheriting in co-ownership for the time being. Co-ownership, however, requires all co-owners' involvement for a future sale or use, and is a spark for co-ownership division (Civil Code Articles 256 and 258) if opinions split. The practice of selling co-owned inherited property is set out at selling co-owned inherited real estate.

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Option	When it fits	Points to note
Paying compensation in installments	When the taker has stable income	State timing and amounts in the agreement; arrears are a spark for disputes
Borrowing from a financial institution	When you want to pay in a lump sum	Repayment plan; the loan is at the institution's discretion
Payment in kind (paying with another property)	When you want to settle other than in cash	Treated as a transfer at the market value at performance; income tax may apply
Switch to conversion division	When no one needs to keep the property	The work of selling and apportioning the capital gains is added
Switch to co-ownership division	When it is hard to reach a conclusion for now	A future sale or use needs everyone's involvement; a spark for co-ownership division

Who should you consult?

Valuation and market appraisal of the real estate and, where a sale becomes necessary, the brokerage and sale contract, are handled by Yotsuba Real Estate Co., Ltd. (licensed real estate agent, Tokyo Governor (1) No. 113304). Preparation of documents such as the estate-division agreement is handled by Yotsuba Administrative Scrivener Office. The tax on compensation and capital gains goes to a tax accountant, inheritance registration to a judicial scrivener, the appraisal where valuation is disputed to a real estate appraiser, and, where there is a dispute over the division itself, to a lawyer — each within its field.

These are independent business entities. You engage each directly. We neither pay nor accept referral fees or introduction commissions. Labour matters go to a certified social insurance labour consultant, engaged by you directly. Consultation is free of charge.

Frequently asked questions

Q. How should the amount of the compensation be decided?
A. The amount is agreed among the heirs. The valuation of the property that underpins it has several yardsticks — market value (appraisal), inheritance-tax valuation (roadside land price, etc.), fixed-asset-tax valuation — and the figure changes with which is taken. Because it settles the other heirs' share in cash, the market value is often the basis. In computing the inheritance-tax base, an adjustment against the inheritance-tax valuation is made (National Tax Agency Q&A No. 4173). Confirm the appraisal with a real estate appraiser where it is disputed, and the tax with a tax accountant.

Q. With compensatory division, can the inherited property be kept without selling?
A. If the taking heir can raise the compensation, the property can be kept without selling. But inheritance registration into the taker's name is required; it has been mandatory since 1 April 2024, with the application required within three years of learning of the acquisition (Real Property Registration Act Article 76-2). Registration cannot be skipped even when you do not sell. The application is handled by a judicial scrivener.

Q. If the compensation is paid with another property instead of cash, what happens with tax?
A. If an heir delivers another property they hold as the compensation property, they may be treated as having transferred that property at the market value at the time of performance, and income tax (capital gains) may apply (National Tax Agency Q&A No. 4173). Paying in cash produces no capital gains. Because the tax changes with which form you choose, it is safer to confirm with a tax accountant before deciding.

Q. Which should I choose, compensatory division or conversion division?
A. It cannot be said in the abstract. If one heir wants to keep living there or keep the property, compensatory division fits; if no one needs to keep it and you want to split the cash, conversion division fits. Compensatory division presupposes that the taker can raise the compensation; if that is hard, compare conversion division and co-ownership division too. The tax and funding side varies with each person's circumstances, so it is safer to compare with a tax accountant. We provide material to judge with a sale outlook (valuation, timing).

Sources (primary)

• e-Gov "Civil Code" — Act No. 89 of 1896. Art. 906 (criteria for estate division — regard to the kind and nature of property, each heir's circumstances and all other circumstances); Art. 907 (agreement / adjudication of estate division); Arts. 256 and 258 (division of co-owned property). Accessed 24 September 2026.
• National Tax Agency Q&A No. 4173 "Computation of the inheritance-tax base where compensatory division is carried out" — the definition of compensatory division; the computation of the tax base for the one who delivers and the one who receives the compensation property; the adjustment where the compensation property is set on the basis of market value; the capital-gains taxation where an heir's own property is used as the compensation property. Accessed 24 September 2026.
• e-Gov "Income Tax Act" — Act No. 33 of 1965. Art. 33 (capital gains); Art. 60 (carry-over of acquisition cost and date for assets acquired by gift, inheritance, etc.). Accessed 24 September 2026.
• e-Gov "Real Property Registration Act" — Act No. 123 of 2004. Art. 76-2 (duty to apply for the ownership-transfer registration on inheritance — within three years of learning of the acquisition; in force from 1 April 2024 (Reiwa 6)); Art. 164 (administrative fine of up to ¥100,000 for neglecting it without good reason). Accessed 24 September 2026.
• Ministry of Justice "Special page on the mandatory application for inheritance registration" — outline of the mandatory application for inheritance registration (in force 1 April 2024). Accessed 24 September 2026.
• Ministry of Land, Infrastructure, Transport and Tourism "Real estate appraisal standards, etc." — the real estate appraisal standards, the basis for the approach where valuation is a point of dispute. Accessed 24 September 2026.

The specific amount of the compensation, the inheritance-tax and capital-gains tax, and the computation of the valuation vary with the property and each person's circumstances. This article does not assess any individual case. Confirm the tax and filing with a tax accountant, the appraisal with a real estate appraiser, and the legal judgment of division with a lawyer or other qualified professional.
This article is general information. It does not judge or guarantee the feasibility of any particular inheritance/division or any tax amount. Valuation and brokerage and the sale contract are undertaken by Yotsuba Real Estate Co., Ltd. (licensed real estate agent); preparation of the estate-division agreement and other documents by Yotsuba Administrative Scrivener Office — independent business entities, engaged separately and directly. Inheritance registration goes to a judicial scrivener, tax to a tax accountant, appraisal to a real estate appraiser, disputes to a lawyer, each engaged directly. We neither pay nor accept referral fees.

About the author

Joji Uramatsu — licensed real estate transaction specialist (Tokyo Governor registration No. 293544) and administrative scrivener (registration No. 25087022). Representative Director, Yotsuba Real Estate Co., Ltd. (licensed real estate agent, Tokyo Governor (1) No. 113304); principal, Yotsuba Administrative Scrivener Office. Kohinata, Bunkyo, Tokyo, about five minutes' walk from Myogadani station. For inherited real estate, the valuation (market appraisal) and the procedures (inheritance, administrative filings) are put on the same table, and the items to confirm with a tax accountant, a judicial scrivener and an appraiser are sorted first. Full profile: author page.