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
- 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”
- For resident companies the net annual income together with other incomes, if any, are taxed at the flat rate of 30%
- 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.
- For partnerships, only a single rent declaration is submitted but the partners will be taxed on their respective shares of the rent income.
- 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%.
- VAT on non-residential Rent(Commercial rent)
This is charged at 16% as it is not exempted by the 3rd Schedule of The VAT Act.
What You Need To Do To Comply With the Law
- 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
- Taxes are paid in four instalments on the 20th of the 4th month, 20th of the 6th month, 20th of the 9th month and 20th of the 12th month of the accounting period. Any balance of tax is payable by 30th of the fourth month after the end of the accounting period.
- Proper records should be kept for all your rental property indicating the following;
Land reference(LR) number
Year of construction
When first let and certificate of occupation
Cost of construction
Number of rentable units and rent per unit
Rent received and rent receipt books
Related expenses (invoices and receipts to support expenses)
Bank accounts for the rental income
Rent schedules (income and expenditure account)
- 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;
Land Rates – Kshs.10,000
Property insurance – Kshs. 20,000
Agents fees – Kshs. 30,000
Repairs – Kshs. 160,000
School fees – Kshs. 120,000*
Loan interest – Kshs. 85,000
Electricity – Kshs. 60,000
During the year, his principal loan repayment amounted to Kshs. 250,000**
- d) His accounting period ends on 31st 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
Agent’s fees 30,000
Loan interest 85,000
Electricity 60,000 365,000
Net taxable rent income (Kshs.) 2,635,000
* 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)
- 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).
- 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; email@example.com
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.