See Tax Matters I here and Tax Matters 2 here.
Notes You Should Take on Rental Income Taxation
Dear Landlords, Landladies and faithful tenants. This affects you. First, you’ll need to note that 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. All rent, premium or any other consideration for use or occupation of property is taxable.
As for the taxation rates, they 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%
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Let’s have Matakwei as our Landlord. He owns a flat in Shika Adabu Estate that has 16 units. These Units had been occupied for the whole year, 2011 with each tenant submitting KES 6,000 as rent each month.
However matakwei’s total annual expenses were:-
Land rates…………………………………….KES 7,000
Property Insurance………………………KES 15,000
Agent fees……………………………………KES 10,000
Repairs…………………………………………KES 10,000
School Fees………………………………….KES 30,000
Loan Interest……………………………….KES 40,000
Electricity…………………………………….KES 20,000
Calculating Matakwei’s Gross rent income thus: –
16 Units × KES 6,000 × 12 Months = KES 1,152,000
Matakwei’s total allowable expenses will be:-
Land rates…………………………………….KES 7,000
Property Insurance………………………KES 15,000
Agent fees……………………………………KES 10,000
Repairs…………………………………………KES 10,000
Loan Interest……………………………….KES 40,000
Electricity…………………………………….KES 20,000
Total KES 102, 000
Thus Matakwei’s Net Taxable Income is KES 1,152,000 less KES 102, 000= KES 1,050,000
Assuming that he doesn’t have any other incomes, Matakwei’s tax for the year 2011 would be
Taxable annual net rent income for the year – KES 1,050,000
The first KES 121,968 @ 10% = KES 12,197
The next KES 114,912 @ 15% = KES 17,237
The next KES114, 912 @ 20% = KES 22,982
The next KES 114,912 @ 25% = KES 28,728
The balance KES 583,296@ 30% = KES 174,989
Thus Matakwei’s Total tax Payable is KES 256, 133
Minus a Personal tax relief of KES 13,944
Net tax payable 242, 189
KRA will thus demand to get KES 242, 189 from Matakwei.
Resident companies will have their net annual income together with other incomes, if any, taxed at the flat rate of 30%. For non-resident companies (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. The net rent income (supported by rent schedules) accruing to the estate of deceased landlords 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.