REAL ESTATE AND RENTAL INCOME TAXATION FREQUENTLY ASKED QUESTIONS (FAQS)

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1 ISO 9001:2008 CERTIFIED REAL ESTATE AND RENTAL INCOME TAXATION FREQUENTLY ASKED QUESTIONS (FAQS) 1. What is considered rental income for tax purposes? Rent, a premium or similar consideration is considered as rental income for tax. It is income earned from rent either directly or sublet. An example of sublet rental income includes but is not limited to, income earned by anchor persons that rent business premises then sub let then to other business entities. 2. Who is taxable? All persons in receipt of rental income unless exempted specifically under any laws e.g. Charitable organizations granted exemption by the Commissioner. 3. Is taxation on rental income a new law? Rental income has been subject to taxation as income tax since 1973 as spelt out in Section 3(2)(a)(iii) of the Income Tax Act which, states that income tax shall be charged for each year of income upon all the income of a person, whether resident or non resident, which accrued in or was derived from Kenya. This should be read with Section 6(1) which, says that gains or profits includes a royalty, rent, premium or similar consideration received for the use or occupation of property. In addition, rent on nonresidential buildings (Commercial rent) is also taxable under Section 5 and 6 VAT Act Cap Is this a new tax and will the burden be passed to tenants through increase in rent? This is not a new tax. There is no justification for landlords to increase rent as this is not a new tax measure. 5. I have not been declaring tax on rental income so I am in a dilemma on how to compute the tax due. The media has given the impression that rental income will be taxed at 30%. Please clarify this. Taxpayers are required to declare the gross rent income but pay tax on net income if residents for tax purposes. This means that property owners should first deduct all expenses that are wholly and exclusively incurred in the production of income e.g. repairs, maintenance, caretaker costs, land rates, insurance, land rent, agent fees, grounds men etc. This is spelt out in Section 15(1) of the Income Tax Act. In certain circumstances they are also allowed to deduct capital allowance. Such expenses have to be supported. Section 15(2)(f) allows taxpayers to also deduct the cost of alterations incurred with an aim of maintaining existing rent. 1

2 Section 15(3)(a), allows them to deduct interest on money borrowed and used to put up rental property. However non-residents do not qualify to claim any expenses. Rates of taxation Taxation rates are dependent on whether the person is an individual or corporate entity and whether resident or non-resident. a) For resident individuals, the annual tax rates (on total annual income including net rent income) are as follows; On the first Kshs. 121, % On the next Kshs. 114, % On the next Kshs. 114, % On the next Kshs. 114, % On all income over Kshs. 466, % Note: The above scales are referred to as graduated b) For resident companies, the net annual income together with other incomes, if any, are taxed at the flat rate of 30%. c) For non-residents (for tax purpose), there is only withholding 30% on gross rent and which then is a final tax, they are not allowed to claim any expenses. d) For partnerships, only a single rent declaration is submitted but the partners will be taxed on their respective shares of the rent income. e) Estate of deceased landlords The net rent income (supported by rent schedules) accruing to the estate of deceased is chargeable at resident corporate tax rate of 30%. f) VAT on non-residential Rent (Commercial rent) This is charged at 16% as it is not exempted by the 3 rd Schedule of The VAT Act. 6. I am ready to comply with the law. However, I wish to know whether I will be granted amnesty for the past years that I did not declare rental income There is no provision for amnesty at the moment. 7. Should I charge VAT on non-residential (commercial) rent and if so what are the requirements? Rent earned from non-residential property (commercial building) is chargeable to tax under the VAT Act. However, to charge VAT on the rent, you must register upon attaining the registration requirements as specified in the 6 th schedule of VAT Act. The registration is done online by choosing the VAT obligation. Visit the KRA online services at for more details. 2

3 8. In case of deceased landlords, who is supposed to account for the tax in respect to the estate of the deceased? The estate administrator or legal personal representative is expected to account for Tax on rental income. 9. What tax incentives are available to landlords? a) Landlords are allowed to claim Industrial Building Allowance on the cost of construction as per paragraph 1(1) of Second Schedule of the Income Tax Act. The applicable rates depend on; the nature, use and area the building is constructed. The rates are provided for in paragraph 1(1) and read together with paragraph 5 of Second Schedule Income Tax Act. b) Wear and Tear allowance on machinery and equipment as per the second schedule of the Income Tax Act c) Personal and Insurance reliefs for individuals as per Section 30 and 31 of Income Tax Act d) Home Ownerships Savings plans for Individuals as per Section 15 of Income Tax Act e) Mortgage relief for Owner occupier Income per Section 15 of Income Tax Act 10. What is the due date for payment of tax on rental income? Taxes are paid in four instalments on the 20 th of the 4 th month, 20 th of the 6 th month, 20 th of the 9 th month and 20 th of the 12 th month of the accounting period. Any balance of tax is payable by 30 th of the fourth month after the end of the accounting period. 11. How is tax on rental income computed, and what is the rate applicable? Depending on the tax resident status and type of the person, the tax is computed either on the gross rent or net rent (after deduction of allowable expenses). For rates of tax refer to question (5) above. 12. What expenses are not allowable as deductions? Expenses not wholly and exclusively incurred in the production of rent income as spelt out in Section 16 of The Income Tax Act, for example principal loan repayments, cost of construction, expenditure of personal nature (e.g. school fees) e.t.c. 13. Are loans repayment taken for acquisition or construction of rental property deductible for tax purposes The principal payment towards the loan is not deductible but the interest is deductible. 14. What rate is applied to rental income arising from furnished lettings? The rate is the same for all types of rent (for details refer to question 5). However, one is allowed to deduct wear and tear for furniture and linen in computing taxable income. 15. I am Kenyan living in diaspora and earning rental income from a property in Kenya. Do I have to pay tax on this income, and if so how? Yes. Any Kenyan living out of the country but owns property in Kenya must pay tax in Kenya on the rent earned. If non-resident (as defined in Section 2 of the Income Tax Act Cap 470), such rent is subject to a withholding tax at 30% of the gross which is then a 3

4 final tax. However, if resident the rate of tax shall be at graduated scale on net rent income. 16. I am a real estate developer. What aspect is taxable? Real estate developers who are in the business of selling property should pay tax on their net profits. They are allowed to deduct expenses incurred as per Section 15 of The Income Tax Act e.g.: a) Cost of land b) Professional fees (Quantity Surveyors, Architects, Civil engineers, Electrical engineers e.t.c) c) Material costs d) Labour e) Advertising/marketing f) Other administrative costs 17. I am a real estate developer. What incentives are available to me? The following are the tax incentives: a) Under Section 20C of the income Tax Income Act the income of Real Estate Investment Trusts (REITs) is not taxable. A REIT is a vehicle which allows investors to pool resources together and invest in Real Estate. The shareholders of REITs acquire units which are tradeable at the stock market. The mode of taxation is the same as that of Unit Trusts which are tax exempt on their investment income This incentive is available effective 1st January, b) Under the VAT Act, persons are allowed to apply for VAT remission on low income housing projects. The following is additional information regarding the incentive: Introduced in 2008 by Finance Act Regulations are contained in Legal Notice No 115 of 5th September, The incentive is meant to encourage housing provision to low income earners. A low income earner means a person whose monthly gross earning amount to Kshs. 35,000 or less A low income house means a house put up at a construction cost of not more than Kshs. 1,600,000 and of plinth area of not less than 30 sq metres A Low income housing project means a project of not less than 20 housing units intended for low income earners Note that the Income Tax Act Cap 470 and VAT Act Cap 476 of the laws of Kenya are available on KRA website at www. kra.go.ke 4

5 Further Clarification For further clarification, please contact Mr. David Gichohi on Tel , Pentronila Muthenya or Call Centre Tel You may also visit the Real Estate and Rental Income Help Desk at Times Tower Building, Ground Floor or your nearest KRA Station for assistance. You can also communicate with us via ; For more details on the real estate and rental income taxation, visit the KRA website; Disclaimer: Taxpayers are notified that if there is any inconsistency between the provision of the Revenue Laws and the information contained herein, then the Revenue Laws shall prevail. 5

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