Rental income and tax: You may want to check if your property is included in the taxable thresholds

By Evans Ongwae

Rental properties dot different parts of the country, with a majority of them located in the big towns such as Nairobi, Mombasa, Kisumu, Nakuru, Eldoret, Nyeri, Kiambu, Murang’a, Kakamega, Embu, Meru, and a host of others that boast diverse businesses or industries.

Rental properties are critical because they house people who work in those businesses, or are used to carry out business. More such properties are being built in satellite towns that border cities. Some of the people who live in these satellite towns work or do business in the nearby cities.

However, if you ask tenants who occupy or use rental properties whether their landlord or landlady pays monthly rental income tax, most will likely give you a blank stare. “Monthly rental income?” they’d probably wonder.

Are owners of rental properties supposed to pay tax for the income they receive from the property every month?

The law distinctly says so, and places the onus of paying the tax, on the property owners.

What is rental income?

According to the Income Tax Act Cap 470, Section 3(2)(a) and Section 6, rental income is that which is derived from the use of a property. It is therefore a payment made to the owner of an immovable property, and includes royalty, rent, premium, or similar consideration for the use or occupation of a property.

Monthly Rental Income or MRI was introduced through the Finance Act 2015, and came into effect on January 1, 2016. It is charged under Section 6A of the Income Tax Act.

Following the enactment of the Finance Act 2020, MRI is applicable to persons earning rental income of between Ksh288,000 and Ksh15 million per annum with effect from January 1, 2021.

The Finance Act 2020 adjusted the scope of those liable to pay MRI from Ksh144,000 to Kshs288,000 rental income per annum for minimum threshold, and from Ksh10 million to Ksh15 million for the maximum threshold.

According to the Income Tax Act Cap 470, landlords whose rental income is below Ksh288,000 per year are exempt from MRI, though the tax on rental income should be declared and paid on the annual income tax return.

A person may elect, by notice in writing to the KRA Commissioner, not to be taxable under MRI, but under the annual income tax regime.

Property owners with rental income above Ksh15 million per year are required to declare the rental income together with incomes from other sources (if any), while filing their annual income tax returns.

Tax rate

MRI is charged at a rate of 10 percent on gross rent received per month.

Expenses are not deductible under the MRI regime. However, under the annual regime, there are allowable expenses. These are expenses wholly and exclusively incurred in the generation of that income. An expense incurred to generate rent is allowed under Section 15 of the Income Tax Act.

Penalty

Monthly rental income tax should be filed and paid on or before the 20th of the following month. Failure to do so on time leads to a penalty for late filing and payment.

Since October 19, KRA, in an effort to expand its tax base, has been collecting data on rental property in the Nairobi Metropolis. The exercise will continue until July 30, 2023.

To learn more about Monthly Rental Income, visit www.kra.go.ke