NAIROBI, Kenya, Jul 13 – The Kenya Revenue Authority has said it will engage landlords to ensure they understand and comply with the rental income tax requirements.
Finance Minister Njeru Githae highlighted guidelines on how to rope in landlords into the tax net during his Budget speech, sparking confusion in the Real Estate market over the law that was dormant over the last few years.
“Rental income has been subjected to taxation since the enactment of the Income Tax Act Chapter 470 of the Laws of Kenya in 1973. It is not a new tax measure being enforced. What KRA seeks to address is the compliance issues,” Commissioner of Domestic Taxes Department Alice Owuor said.
In order to ensure compliance KRA will have to map out all residential and commercial areas by collecting data from the Ministry of Lands, municipal councils and other government departments and then compare that data with the tax returns filed with the Authority.
According to the Kenya Economic Survey, the Real Estate sector grew by 16 percent and 17.5 percent in 2009 and 2010 respectively, however these gains have not translated to growth in revenue for the KRA from the sector.
This is in part due to property developers, in the past, seeking to shield the profits they make by erroneously treating returns as Capital Gain, a tax that was suspended in 1985.
Contrary to the impression by sections of the media that rental income will be taxed at 30 percent; rent income is subject to corporate tax rate of 30 percent of taxable income.
This means that property owners should first deduct all expenses that are wholly and exclusively incurred in the production of income that include repairs, maintenance, caretaker costs, land rates, insurance, land rent, agent fees, grounds men.
Property owners with mortgages that exceeded rent rates they collected have been concerned that their rental income would be eroded further by the 30 percent deduction.
“In cases where your rent does not cover the allowable expenses that means you will have a loss and therefore there will be no tax, which you will carry forward to the following year until you have taxable rental income,” Owuor said.
An amendment made to the Income Tax Act in 2010, now allows for losses to be carried forward for the subsequent four years unless an application to extend the loss claim period is made and approved by the minister.
Landlords are also entitled to some tax incentives such as Industrial Building Allowance at a rate of 25 percent per annum of construction costs, only if they have invested in infrastructure such as roads, power, water and sewer systems.
However, rental income from commercial buildings is also subject to VAT at the rate of 16 percent provided that the income amounts to Sh5 Million or more in a year.
The allowances significantly reduces a tax payer’s taxable income, with others including Wear and Tear Allowance on machinery and equipment, Personal and Insurance relief for individuals, Home Ownership Savings plans for individuals and Mortgage relief for Owner occupier Income.