Rental income is a key aspect of property ownership in Kenya, but understanding the taxation of this income can be complex. Whether you’re a seasoned property owner or new to the world of real estate, it’s essential to navigate the intricacies of Kenya’s tax system to ensure compliance and optimize your returns. In this article, we’ll break down the various taxation regimes for residential and commercial rental properties, highlighting the key provisions, allowable expenses, and penalties for non-compliance.

Section 3(1) Subject to, and in accordance with, this Act, a tax to be known as 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.

Section 3(2)(a)(iii) Subject to this Act, income upon which tax is chargeable under this Act is income in respect of gains or profits from a right granted to another person for use or occupation of property;

What is Rent?

Section 6 “gains or profits” includes a royalty, rent, premium, or similar consideration received for the use or occupation of property.

Rent means payments received from a right granted to another person for use or occupation of property, which includes premium or similar consideration received for the use or occupation of property.

Immovable property includes land, whether covered by water or not, any estate, right, interest or easement in or over any land and things attached to the earth or permanently fastened to anything attached to the earth, and include a debt secured by mortgage or charge on immoveable property; and a mining right, an interest in a petroleum agreement, mining information or petroleum information.

There are two broad categories of rental property:

1. Commercial rental property and;
2. Residential rental property

Residential Property

Under taxation of income from rent on use or occupation of property, the following Taxation Regimes apply:

1. Rental Income Taxation Under Annual Regime
2. Monthly Rental Income Regime (MRI)

Rental Income Taxation Under Annual Regime

Landlords with residential rental income below KShs. 288,000 or above KShs. 15 million per year shall be required to file annual income tax returns and declare this rental income together with income from other sources.

• Rent is charged on the actual amount received
• Expenses incurred to generate rent is allowed under section 15 of the Income Tax Act.
• Tax is calculated under the prevailing individual graduated scale or corporate rate of 30%
• MRI is the final tax. The landlord is not required to file annual returns

In addition, rent on non-residential buildings (Commercial) is taxable under the VAT Act (No. 35 of 2013) – Laws of Kenya, as long as the minimum threshold of KShs. 5M gross rental income has been attained.

Workings:

Gross rental income                                        XX

Less:

Allowable expenses (Section 15, ITA)           (xx)

Net taxable Rental Income                           xx

Examples of allowable expenses:

1. Land rent and rates
2. Regular repairs and maintenance (without leading to an increase in the existing rent)
3. Cost of structural alterations to maintain existing rent, eg, renovations
4. Insurance premiums paid to insure the property
5. Revaluation expenses incurred in insuring the property
6. Mortgage interest paid on the loan borrowed to buy the rental property
7. Bad debts written off (rent in arrears)
8. Legal expenses incurred in debt collection while defending property rights
9. Reasonable advertising costs to attract tenants
10. Commissions and fees paid to agents to manage the property
11. Salaries and wages paid to caretakers and other workers taking care of the property
12. Wear and tear allowance on furniture where the property is let out fully furnished
13. Cost of water, electricity, and telephone where paid by the land lord under a lease agreement.

If a property has been let for a period of less than 12 months, expenses relating to the whole year must be apportioned accordingly.

Examples of non-allowable expenses:

1. Cost of extensions
2. Cost of structural alterations that increase the existing rent
3. Private expenses of the landlord
4. Expenses incurred before the letting period. The only expenses allowed, which are incurred before letting, include advertising, recruitment, staff salaries and wages, and stationery.

Example 1

Gross Rent income for the year:

Commercial Property A – 5 units*KShs. 20,000*12months       1,200,000

Commercial Property B – 10 units*KShs. 15,000*12months      1,800,000

Total Rent income in KShs.                                                                         3,000,000

Less: Allowable expenses (KShs.):

Land Rent/Rates                                      10,000

Insurance                                                  20,000

Agent’s fees                                              30,000

Repairs                                                     160,000

Loan interest                                             85,000

Electricity                                                 60,000

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

Monthly Residential Rental Income Regime

Section 6A (1): Notwithstanding any other provision of this Act, a tax to be known as residential rental income tax shall be payable with effect from the 1st January 2016 by any resident person from income which is accrued in or derived from Kenya for the use or occupation of residential property, and which is in excess of Ksh. 288,000 but does not exceed Ksh.15m during any year of income (Ksh.288, 000-Ksh.15M):

For non-residents: Withholding income tax of 30% -Section 35(1)(c):  is deducted on rental income.

Residential rental income, also known as Monthly Rental Income (MRI) refers to income derived from renting out residential properties for use or occupation.

• This tax applies to individuals and corporates with residential property

• Charged under Section 6A of the Income Tax Act, Cap 470, laws of Kenya.
• Introduced by the Finance Act, 2015
• Effective from 1st January 2016

3^rd Schedule Paragraph 10. The rate of tax in respect of residential rental income shall be 7.5% of the gross rental receipts of a taxable resident person under section 6A (w.e.f. 1^st January 2024).

The landlord is required to pay rental income tax at a rate of 7.5% (w.e.f. 1^st January 2024) on the gross rent received either monthly, quarterly, semi-annually, or annually, though the return must still be filed monthly. In addition, no expenses, losses, or capital allowances are allowed for deduction from the gross rent at the time of filing the return. Therefore, a landlord earning gross rent of Ksh. 30,000 in a particular month will be required to pay rental income tax at the rate of 7.5%, that is 7.5%*30,000 = KShs.2,250.

The MRI return is filed on iTax, on or before the 20^th day of the following month. For any month that the landlord does not receive any rent he/she shall file a NIL return.

Residential rental income is final tax; therefore, persons are not required to declare the same in their annual income tax returns.

Exemptions

The simplified tax (MRI) does not apply to:

• Non-residents: (1) Section 35(1)(c): Every person shall, upon payment of any amount to any non-resident person not having a permanent establishment in Kenya in respect of a rent, premium or similar consideration for the use or occupation of property.

For non-residents, withholding income tax of 30% -Section 35(1)(c):  is deducted on rental income.

Section 15A of the Tax Procedures Act, 2015: Appointment of tax representative by non-resident person:

• In a case where a non-resident person with no fixed place of business in Kenya is required to register under a tax law, the non-resident person shall appoint a tax representative in Kenya in writing.
• Where a person required to appoint a tax representative in accordance with subsection (1) fails to do so, the Commissioner may appoint a tax representative for that person, and the tax representative so appointed shall have the duties and obligations specified under section 15.
• Landlords earning less than KShs.288, 000 and more than KShs.15M per annum

Note: Taxpayers who wish to remain in the current tax regime on rental income may elect to do so by writing to the Commissioner

What is the penalty for late filing and late payment of MRI?

Due Date: Returns are filed and tax payable on or before the 20th of the following month.

Penalties & Interest:

1. Penalty on late filing/Late submission (Section 83(1)(d)(i) & (ii) of TPA, 2015): Late filing of MRI returns attracts a penalty of:

• 2,000 or 5% of the tax due whichever is higher for individuals
• 20,000 or 5% of the tax due whichever is higher for corporates

2. Penalty on late payment (Section 83A of TPA, 2015): 5% of the tax due and
3. Late payment interest of 1% per month on the unpaid tax until the tax is paid in full (Section 38(1) of TPA, 2015).

In conclusion, understanding the taxation of rental income in Kenya is crucial for all property owners, whether residential or commercial. By adhering to the correct tax regime, taking advantage of allowable expenses, and ensuring timely filing of returns, landlords can avoid unnecessary penalties and fines. With a clear understanding of the rules and regulations, property owners can make more informed decisions and secure their financial success in the ever-evolving real estate market.

Content By:

Kennedy Kiio

Senior Tax Advisor

kennedy.kiio@ke.andersen.com