REAL ESTATE AND RENTAL INCOME TAXATION

WHAT YOU NEED TO KNOW

The Law 
Rental income is taxable under Section 3(2) (a) (iii) of the Income Tax Act, Cap 470 Laws of Kenya. In addition, rent on non-residential buildings (Commercial) is also taxable under Section 5 and 6 VAT Act Cap 476.

What is Taxable?

All rent, premium or any other consideration for use or occupation of property.

Rates of Taxation

Taxation rates are dependent on whether the taxable person is an individual or corporate entity and whether they are resident or non resident

1.      For resident individuals, the  annual tax rates  (on total annual income including net rent income) are as follows;

On the first Kshs. 121,968 ........................10%

On the next Kshs. 114,912 .......................15%

On the next Kshs. 114,912 .......................20%

On the next Kshs. 114,912 .......................25%

On all income over Kshs. 466,704..............30%

   Note: The above scales are referred to as “graduated”

2.      For resident companies the net  annual income together with other incomes, if any, are taxed at the flat rate of 30%

3.      For, non-residents (for tax purpose) there is only withholding tax @ 30% on gross rent and which then is a final tax, they are not allowed to claim any expenses.

4.      For partnerships, only a single rent declaration is submitted but the partners will be taxed on their respective shares of the rent income.

5.      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%.

6.      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.

What You Need To Do To Comply With the Law

1.      Obtain Personal Identification Number (PIN) if you do not have one yet to enable you to transact any business with KRA including filing returns and paying taxes. KRA issues PIN on-line. To apply for PIN, please visit KRA online services at; www.kra.go.ke

2.      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.

3.      Proper records should be kept for all your rental property indicating the following;

1. Land reference(LR) number
2. Year of construction 
3. When first let and certificate of occupation
4. Cost of construction
5. Building plans
6. Loan agreements
7. Number of rentable units and rent per unit
8. Rent received and rent receipt books
9. Related expenses (invoices and receipts to support expenses)
10. Lease/tenancy agreements
11. Bank accounts for the rental income
12. Rent schedules (income and expenditure account)

4.      At the end of the accounting period;

a)      Income Tax on Rental Income

·          

• Prepare rent schedule for all let property showing; number of property, rent received per property, gross rent received, and all expenses incurred per property.
• Deduct only allowable and supported expenses to arrive at the chargeable rent. Examples of tax computations are provided herein. 
• Complete tax return and attach rent schedule in support thereof. When you are filing return online, enter the details of the rent schedule as provided in the sheet available with the online tax return form. The sheet is provided when you click in the space to declare/enter taxable rent profit.
• Submit self-assessment return within six months after the close of the accounting period.  

b)     VAT on Commercial Rent

Prepare VAT Account showing the VAT charged to tenants (output VAT) and allowable VAT on purchases (input VAT) incurred in the month.

·         Complete VAT return and submit together with payment by 20th   day of the following month.

·         Note: Receipts/invoices issued to tenants are supposed to show the VAT   charged and shall be ETR generated.

·         Note the following about online filing of the tax returns:

·         You are encouraged to file your tax returns online. For details on how to file your returns online, please visit the KRA online services at www.kra.go.ke.  

·         To file online, you must register with KRA online services.

Examples of a Rent Schedule

Example 1: Resident Individuals

a)      Mr. Landlord  has two properties from which he is earning rents as follows:

• Property A with 5 units, at Kshs. 20,000 per month per unit
• Property B with 10 units at Kshs. 15,000 per month per unit

b)      All units were occupied by tenants throughout the accounting period of 2010.

c)      During the accounting period, he incurred the following expenses;

1.  
1. Land Rates – Kshs.10,000
2. Property insurance – Kshs. 20,000
3. Agents fees – Kshs. 30,000
4. Repairs – Kshs. 160,000
5. School fees – Kshs. 120,000*
6. Loan interest – Kshs. 85,000
7. Electricity – Kshs. 60,000
8. During the year, his principal loan repayment amounted to Kshs. 250,000**

d)     His accounting period ends on 31^st December, 2010.

e)      Computation of taxable rent income is as follows;

Gross Rent income for the year:

Property A -   5 units x Kshs. 20,000 x 12 months        1,200,000

Property B – 10 units x Kshs. 15,000 x 12 months       1,800,000

            Total Rent income in Kshs                                 3,000,000

Less: Allowable expenses (Kshs.):

Land Rates                            10,000

Insurance                             20,000

Agent’s fees                          30,000

Repairs                               160,000                          

Loan interest                        85,000

Electricity                             60,000                        365,000

Net taxable rent income (Kshs.)                               2,635,000

Notes:

* School fees is a personal expenditure that is not allowable deduction.

** Principal Loan repayment is a capital item and not an allowable deduction

f)       Computation of Mr. Landlord’s tax for the year (on the assumption that he does not have any other incomes):

Taxable annual net rent income for the year - Kshs. 2,635,000

The first Kshs. 121,968 @ 10%            12,197

The next Kshs. 114,912 @ 15%           17,237

The next Kshs. 114,912 @ 20%           22,982

The next Kshs. 114,912 @ 25%           28,728

The balance Kshs. 2,168,296@ 30%  650,488

     Total tax Payable                         731,632

Less: Personal relief                             13,944

 Net tax payable                                 717,688

g)      If Mr.Landlord had paid 4 equal instalments of Kshs. 150,000 each for the year totalling Kshs 600,000 then he would have a balance of Kshs. 117,688 to pay by 30th April 2011. However, if he had not paid any instalments in advance, then the entire of the Kshs. 717,688 would be payable by 30th April 2011 plus penalties and interest for failure to pay instalments when they are due as per the law.

Example 2: Resident Limited Company

a)      In the above case, if the landlord was a resident limited company say M/s Landlord Ltd, then the net rent as computed above would be taxed at the corporate rate of 30% and all other matters remaining the same except that there is no personal relief.

b)      Therefore, tax computation will be as follows;

Net taxable rent (Kshs.)               2,635,000

Corporate tax @ 30%                      790,500

Less: instalment taxes paid            600,000

      Balance due by 30/4/11              190,500

Example 3 – Non Resident Persons

a)      For non-resident persons, the gross rent income is subjected to withholding tax at 30%, which is a final tax.

b)      Therefore, tax computation will be as follows;

Gross rent income (Kshs.)      3,000,000

Withholding tax @ 30%             900,000 (Please note this is a final tax)

5.       Kenyans in the Diaspora

Any Kenyan living out of the country but own 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 final tax. However, if resident the rate of tax shall be at graduated scale on net rent income (see example 1).  

6.      Further Clarification

For further clarification, please contact Mr. David Gichohi on Tel. 020281-6095, Pentronila Muthenya 020-2813086  0r Call Centre Tel. 020 4999999. 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 email; rentalincome@kra.go.ke

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

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.

Source    http://www.revenue.go.ke/