What You Need To Know About Rental Income Tax in Kenya
Rental income in Kenya is a key revenue stream for property owners, subject to a complex web of regulations and taxes under the Income Tax Act and the Value Added Tax Act. This comprehensive guide aims to delve into the intricacies of rental income taxation in Kenya, covering essential aspects such as rates, deductions, incentives, and recent updates to equip landlords with the knowledge needed for compliance and strategic financial planning.
This is a Tax Guide for Landlords
What is the tax rate for Residential Rental Income Tax (RRIT)?
The RRIT is a conclusive tax payable monthly and is applicable to incomes ranging from Ksh. 144,000 (Ksh. 12,000 monthly) up to Ksh. 10,000,000 per annum. Should the income fall below or exceed the specified limits, landlords are obligated to file income tax returns, declaring their rental income along with other sources of income.
RRIT is levied at a fixed rate of 10% on Gross Rent received and is due when landlords receive payments from tenants, whether monthly, quarterly, semi-annually, or annually. Monthly filing of returns is a mandatory requirement.
According to the Income Tax Act, expenses incurred in the production of rental income are considered allowable. Section 15 of the Act stipulates that, for the purpose of determining the total income of an individual for a given year, all expenses wholly and exclusively incurred in the production of that income shall be deducted. Such permissible expenses encompass:
- For the property owner, any amounts utilized for structural alterations necessary to maintain existing rent, except for alterations for the extension or replacement of the premises.
- Expenditure incurred by a lessee in the case of a lease or similar transaction.
- Interest paid in respect of money borrowed wholly or exclusively for the production of investment income.
- Land rent and rates.
- Agent fees.
- Groundkeeper expenses.
- Other expenses as provided for under Schedule 2 of the Income Tax Act.
How is Taxable Income Determined?
The RRIT payable is determined by deducting Allowable Expenses from Gross Rental Income. For instance, if Mr. X has three rental properties accruing Kshs. 25,000, Kshs. 35,000, and Kshs. 40,000 per month, and he pays land rent/rates of Kshs 15,000, insurance of Kshs 15,000, and groundkeeper fees of Kshs 5,000, the monthly RRIT payable is calculated by subtracting the allowable expenses (Kshs. 35,000) from the total rent acquired (Kshs. 100,000), resulting in a net taxable income of Kshs. 65,000.
How is Rental Income Filed and Paid?
RRIT is filed on or before the 20th of the subsequent month through the iTax system by declaring the gross rent. The tax payable is automatically computed using the 10% rate during the filing process. This systematic approach simplifies the filing and payment procedure for landlords, ensuring compliance with the RRIT regulations.
Taxation of Rental Income under Kenyan Laws
(A) Income Tax:
Rental income in Kenya is subject to taxation under Section 3(2) (a) (iii) of the Income Tax Act, Chapter 470 of the Laws of Kenya. This includes premiums or similar considerations, and it’s essential for landlords to understand the nuances of this taxation.
1.1. Overview of Taxable Considerations:
- Rental income, premiums, or similar considerations are deemed taxable income.
- Commercial building rent is additionally subject to a 16% VAT rate, as per sections 5a and 6 of the Value Added Tax Act, Chapter 476 of the Laws of Kenya.
1.2. Taxation for Resident and Non-Resident Taxpayers:
- Resident taxpayers must declare gross rent income but pay tax on net income after deducting allowable expenses.
- Non-resident taxpayers are not allowed to deduct expenses from rental income; instead, a 30% withholding tax is applied.
1.3. Rates of Taxation:
- Individual rates are graduated, with the entire income, including net rental income, taxed at progressive rates.
- Resident corporate taxpayers face a flat 30% rate.
- Non-resident taxpayers are subject to a 30% withholding tax on gross rent, and partnerships are taxed individually.
1.4. Incentives for Landlords:
- Industrial Buildings Allowance, Wear and Tear Deduction, and exemptions for Real Estate Investment Trusts are offered as incentives.
- Additional incentives include personal and insurance reliefs, Home Ownership Saving Plans, Mortgage Relief, and VAT incentives for low-income housing.
Monthly Residential Rental Income Tax
2.1. Definition and Tax Rate:
- Monthly Residential Rental Income Tax is applicable to resident persons with annual residential rental income between Kshs. 288,000 and Kshs. 15 million.
- The tax rate is a flat 10% on gross rent received, with monthly returns mandated for landlords.
2.2. Penalties for Late Filing and Paying:
- Penalties apply for late filing and paying, with rates specified based on the amount of due tax.
- Returns must be filed and tax paid on or before the 20th of the following month.
2.3. Annual Declaration for High-Income Landlords:
- Landlords earning above Kshs. 15 million annually must declare rental income alongside other sources in annual returns.
Withholding Tax Regime on Rental Income
3.1. Overview of Withholding Tax:
- Withholding tax applies to both residential and commercial properties, as per section 35(3)j of the Income Tax Act.
- Residents face a 10% withholding tax, while non-residents incur a 30% withholding tax as final tax.
3.2. Penalties for Non-Payment:
- Penalties and interest rates are outlined for non-payment of withholding tax.
- Non-residents are subject to a 30% withholding tax, and exempt persons are not subjected to withholding tax.
3.3. Payment Procedures:
- Withholding tax is payable on or before the 20th of the following month.
- Non-residents are subject to a 30% withholding tax, and the tenant is treated as an agent responsible for remittance.
Monthly Rental Income (MRI) Processing and Remittance
4.1. Simplified Tax Regime for Residential Rental Income:
- Monthly Rental Income Tax (MRI) was introduced in 2016 to simplify taxation for residential rental income.
- Taxed at a flat rate of 10%, with no complex bookkeeping required, and considered a final tax.
4.2. Eligibility and Exemptions:
- MRI is applicable to individuals and corporates earning residential rental income below Kshs. 10 million per annum.
- Exemptions include individuals earning less than Kshs. 12,000 per month, rental income from commercial property, and non-resident landlords.
4.3. MRI Return and Payment:
- Monthly returns are filed online on iTAX, with penalties for late filing and payment.
- MRI is a final tax and need not be disclosed in annual returns if no other income is earned.
Recent Updates and Future Trends
5.1. Finance Act 2023:
- The Finance Act 2023 introduces a 7.5% tax rate for MRI, effective from January 2024.
- A provision for the appointment of rental income tax agents for collection and remittance has been introduced, effective from July 2023.
5.2. MRI Registration and Filing Procedures:
- Online registration through iTax is mandatory, requiring details on property and PINs of tenants.
- Filing and payment procedures are outlined for landlords to ensure compliance with the updated regulations.
Understanding the intricacies of rental income taxation in Kenya is vital for landlords to navigate the regulatory landscape effectively. This comprehensive guide provides a detailed overview of various tax regimes, rates, incentives, and recent updates, empowering landlords to make informed financial decisions and ensuring compliance with Kenya’s evolving tax laws.