Renting out property is a solid way of earning recurring income. In Kenya, the income-tax regime includes rental business activities. This is a way to boost government revenue as more people venture into real estate.
As a landlord earning less than Ksh. 12,000, you’re expected to file and declare your rental income alongside other sources that generate income for you. On the other hand, effective January 2016, Finance Act 2015 stipulates that persons or companies that generate residential income of more than Ksh. 12,000 but less than Ksh. 833,333 per month (that is 10 million per year) fall in the 10% rental income tax category.
Generally, there are two ways to earn an income from property building for landlords.
One way is commercial buildings and the other residential.
Both categories of investment properties are subject to income tax and VAT with a few exceptional cases here and there.
Rent accrued from non-residential (aka commercial) property attracts a 30% tax obligation for resident landlords, whereas for a non-resident landlord, a 37.5% rate applies.
How much tax will I pay on my residential property income
Income from residential property is acquired from renting out investment properties with the sole purpose of renters dwelling in the building.
Landlords have the discretion to decide when or what time of the month the rent is going to be paid throughout the stay of a renter.
Mostly rent is charged monthly, but some landlords prefer quarterly, semi or annual rent.
Nonetheless, in the eyes of the tax collector, rent is collected monthly.
And so, if the rent is delayed file nil returns as necessary.
Another important thing to note is that total income is taxable regardless of expenses. Also, the tax you pay does not take into account the following:
- Property size
- Materials you used to construct the building
- The location of the property
- How old the owner is
Tax is levied on the basis of whether the income is between KES. 144,000 – KES. 1 million a year or not.
Monthly rental income between Kshs. 12,000 – 833,333
In 2016, the Finance Act 2015 introduced Section 6A into Income Tax Act Cap 470, to simplify residential rental income tax compliance for landlords.
A landlord earning less than 10 million annually from residential rentals is not allowed to deduct any expenses or expenditure from gross rent.
Thus, a tax of 10% on gross income received within the tax period of one month, should be paid to KRA.
Property owners must post their rental income tax returns by 20th of every subsequent month the rent is received.
If no rent was paid during a period of one month, the landlord will file nil return.
However, KRA will punish those who abscond their tax obligations by serving either of the two penalties:
- Kshs. 20,000
- Or 5% of principal amount due
Any other previous tax amounts that will not have been paid by 20th will attract an additional penalty at 20% of the tax payable and interest of 1% per month.
Good thing is that this tax is final, which means a landlord won’t be required to file annual returns.
Unless you have other sources of income, returns are to be filed monthly. For other streams of income other than rent, do not forget to file returns before the June 30th deadline.
Say two residential properties earn Jackson Kshs. 60,000. By the 20th of the following month, Jackson is going to file returns as well as pay 10% of 60,000 = Kshs. 6,000 in monthly tax.
The provisions of tax law in Kenya allow the rental income tax declaration to be in terms of residential rental income tax or Pay As You Earn (PAYE).
In approximation, PAYE is 30% of net residential rental income, all expenses excluded. Maintenance, mortgage interest and service charges are part of the cost that reduces earning potential.
As such, PAYE rate is beneficial than residential rental income tax, more so in situations where the taxpayer is at a loss or simply making marginal profits.
From the example above, the following are comparable deductions of what Jackson will likely end up paying:
|PAYE 30% net rate||RRI 10% gross rate|
|Gross rental income||60,000||60,000|
|Percentage effective tax||2.33%||10%|
|Total costs tax inclusive||-13,400||-18,000|
|Profit after tax & expenses||46,600||42,000|
We’ve assumed expenses to be 12,000. This figure could be higher depending on whether the property was built on mortgage or loan at a conservative approximation of 14% interest rate per annum.
As time goes, the rental business’s costs start to diminish and revenues go up to a point where the tax collector will advise the landlord that the reduction is very substantial to prompt a switch to 10% rate.
Monthly income more than Kshs. 833,333 (10 million / year)
Rental income that falls under this group is over 10 million shillings annually.
Despite your property being permanent or temporary, you’re still required to meet the tax obligations of this category.
However, the tax rate depends on whether you’re Kenyan citizen or not. 30% tax rate applies for residents, while non-resident taxpayers pay 37.5% in rental income tax.
This amount is by no means a flat tax and is subject to other things like:
- Rented space
- Rent price
- Cost of generating rent
Unlike the 12,000 – 833,333 income bracket, taxpayers are allowed to make four installment payments as follows:
- 20th of April
- 20th of June
- 20th of September
- 20th of December
Any tax balance of the previous year is payable before 30th of April. If the tax owed exceeds 10%, KRA will levy penalties and impose interests.
With that said, it’s upon the taxpayer to make correct installment estimates.
One way of establishing the estimate is by increasing the previous year’s tax by 10%, assuming that the business grew by the same margin.
Or alternatively, use the current year’s tax when considering the payable tax within a certain installment period and deduct allowable expenses.
Keep in mind that coming up with incorrect installment amounts of more than 10% variance will attract a severe penalty.
You are also required to let the Commissioner have full knowledge of the method of estimation you’re using and also if you need to make changes.
Withholding tax on rental income
The Finance Act 2016 provides for levying 10% withholding tax on rental income.
Usually, a Commissioner will in writing acknowledge a tenant or agent to withhold 10% tax and remit it to KRA instead of paying the landlord.
A withholding agent can be a company which rents one or many houses from a single landlord and are therefore recognized by KRA as tenants who will pay taxes for the properties.
By 20th of every month, the withholding agent should make tax returns for the previous month.
Non-resident landlords are charged 30% withholding tax.
If an appointed agent fails to remit withholding tax, the individual or company will be charged a penalty of 10% on the tax due and 1% interest per month until the tax is paid in full.
The interest rate will be not more than the principal tax, while the withholding tax penalty will be capped at Kshs. 1 million.
In the event where the landlord is making losses, the rental income is overburdened by expenses, and there’s an overpayment of tax, a refund application will be written to the Commissioner.
How is commercial rental income taxed
By law, a commercial property is any built, acquired, inherited or rented space or land that has been approved by the county government or local authority to house or operate a business.
Owners of these commercial rentals receive an income that is taxable at the rate of 30%. Their non-resident counterparts pay a 37.5% tax rate for possessing the same kind of property.
Just like the over Kshs. 10 million tax bracket, commercial rental income earners pay estimated tax amounts in installments.
This explains why payable taxes are determined before completion of auditing accounts.
Again, this is done using either of the two methods described earlier:
- Paying 10% more tax if the business profits went up by 10% in the new year.
- Using the current actual tax rate to calculate the actual tax dues for the installment period in consideration.
Whenever establishing payable installments it’s good to ensure they do not vary so much, as a difference of more than 10% will attract a hefty fine.
As a rule of thumb, if you need to amend the installment estimation you have, make the Commissioner aware beforehand and inform him of the method used to come up with the estimates.
The income tax collector and regulator KRA is very specific on the dates to meet tax payments.
Therefore, commercial rental income tax is due for payment on the following dates:
- 20th of month 4
- 20th of month 6
- 20th of month 9
- 20th of month 12
Once you get to the end of the year, get the accounts of your rental business audited to establish the tax for the whole year.
If there are tax balances, organize for them to be remitted by 30th April the following year, which is the fourth month.
Keep in mind that if the tax balance exceeds 10%, KRA will fine you, because it’s your obligation to pay tax on time and installments are not final taxes.
The government gives a few non-individual owners the liberty to choose any year-end they desire.
But for most individual owners, the year starts in January and ends on 31st December. Consequently, annual returns must be filed on or before 30th June the following year, failure to which an offender will be fined or charged interest.
Withholding income tax
Under The Finance Act 2016, a written request to and approval by the Commissioner warrants withholding tax on rental income for using or occupying the property.
Once the Commissioner appoints a tenant to a resident landlord’s property, the individual or company will act as a withholding agent and will be liable for a 10% rental income payable to KRA by 20th of the subsequent month.
Withholding agents who’ve rented properties belonging to non-resident landlords have a withholding tax obligation of 30% on the payment and this is the final tax.
VAT on rental income
VAT on rental income only applies to commercial properties.
A VAT of 16% on the income is due on 20th of the month that follows. The registered taxpayer, appointed agents or landlord will make these tax returns every single month.
Withholding of VAT is also provided for in The Finance Act 2016.
The Commissioner will appoint withholding agents and notify them in writing of the requirement to withhold VAT on rental payments.
Both nominated agents of resident and non-resident landlords, are mandated to withhold 6% VAT and remit to KRA. Deadline to do so is the 20th of the subsequent month.
From what you’ve heard and gathered from this post, owning a rental property can complicate your taxes but not so much.
Honestly speaking, rental income taxes are more simplified than in the past where tax computation was a complicated affair.
For instance, the residential rental income is taxed at a flat rate of 10%, unlike the 10-30% tax in the old tax regime.
Another advantage is that landlords are saved the hassle of keeping up to date all expenditure records and reporting them since expenses are not a requirement anymore. And this type of tax is final, meaning there’s no need to submit an annual rental income tax report.
If you have both residential and commercial properties, you will have to file two returns:
- Simplified monthly 10% tax returns on gross residential rental income
- And annual declaration of commercial rental returns alongside other incomes.
Needless to say, it’s easier to compute tax more than ever, which eliminates the need to have an accountant.
On that account, you have no excuse as a landlord not to submit returns in time.