Earning income from rental properties can be a lucrative venture but it also comes with tax obligations that every landlord should understand. In Kenya, rental income is taxable under the Income Tax Act, and the mode of taxation depends on whether the property is residential or commercial.
What Is Rental Income?
Rental income refers to any payment received by a taxpayer for allowing another person to use their property. This income can arise from both residential and commercial properties, and it must be declared to the Kenya Revenue Authority (KRA).
What is Rent?
Rent means payments received from a right granted to another person for use or occupation of immovable property which include premium or similar consideration received for the use or occupation of property
Residential Rental Income Tax
Residential rental income tax is also known as Monthly Rental Income (MRI) was introduced through the finance act 2015 and came into effect on 1st January 2016.
Following the enactment of the finance act 2020 residential rental income is applicable to persons earning rental income which is in excess of two hundred and eighty thousand shillings but does not exceed fifteen million shillings during any year of income with effect from 1st January 2021.
- Tax Rate: 7.5 % of the gross monthly rental income effective 1st January 2024.
- Filing Frequency: Paid monthly, on or before the 20th day of the following month.
- Returns: Landlords under this regime do not file any other rental income return.
- Allowable Expenses: None is permitted the 7.5% tax is applied on the gross amount received is a final tax, with no deductions permitted.
Exemptions from Residential Rental Income Tax
- Rental income from commercial property
- Non-rental landlords.
- Landlords who earn rental income in excess of Kshs 15,000,000 per year.
Penalties applicable to Residential Rental Income Tax
- 2,000 or 5% of the tax due; whichever is higher for individuals Kshs 20,000 or 5% of the tax due; whichever is higher for body corporates
- Late payment penalty is 5% of the tax
- Late payment interest is 1% per month or part of the month.
Commercial Rental Income
For landlords earning from commercial properties, the taxation approach differs. Here, the net rental income that is, income after allowable deductions is subject to tax.
- For Individuals: Taxed using the graduated income tax rates.
- For Companies: Taxed at the corporate tax rate of 30%.
This method allows landlords to deduct certain expenses before determining their taxable income.
Allowable Deductions on Rental Income
Landlords of commercial properties can reduce their taxable income by claiming legitimate business expenses. These include:
- Maintenance and Repairs: Costs for maintaining the property, such as land rent, rates, insurance, salaries, wages, and repairs.
- Structural Alterations: Expenses on structural changes necessary to maintain existing rent levels.
- Bad Debts: Unrecoverable rent that has been proven to be uncollectible.
- Interest on Mortgage: Interest paid on loans used to finance property construction or purchase.
- Legal Costs: Legal fees incurred in acquiring a lease not exceeding 99 years.
- Capital Allowances: Deductions related to the use of the building for income generation.
- Management Fees: Commissions paid to property agents for managing or collecting rent.
- Inspection Expenses: Costs incurred during regular property inspections by the landlord or their agent.
Non-Allowable Expenditures
Certain types of spending are not deductible when calculating taxable rental income. These include:
- Major renovations or extensions to the property.
- Purchase of capital assets such as water tanks.
- Significant structural upgrades or property expansion costs.
These are considered capital expenditures and are not treated as operational expenses.
Understanding how rental income taxed helps property owners is stay compliant and avoid unnecessary penalties. Whether you own a few residential units or a large commercial complex, keeping accurate records of income and expenses is essential.
By managing your rental income taxation properly, you not only stay on the right side of the law but also optimize your investment’s financial performance.
Thank you for reading this article. Have a fruitful day, won’t you!!!Bottom