In Kenya, several people have invested in the real estate sector, mostly in rental houses rented out for occupation or carrying out business. Rental activity as a business is included in the Income-tax regime. In this article, we will discuss the rental income tax regime in Kenya that was introduced by the finance ACT 2015, section 6A provides a regime on rental income.

The rental income tax regime is aimed at increasing government revenue as more people venture into the real estate sector. The sector has been a boom in Kenya with properties selling as fortunes and giving good returns to investors. 

Most real estate companies are operating under an off-plan model where they sell houses at off-plan even before the houses are completed. Occasionally the properties are sold at an instalment payment plan which is cheaper than going for a mortgage to buy a home. You can read more on Investing in the Real Estate sector in Kenya from our post here

The imposition of Rental Income Tax

Rental Income tax is a tax payable on the rental property including buildings for residential and for commercial use.

Notwithstanding any other provision of this Act, a tax to be known as residential rental income tax shall be payable with effect from the 1st January, 2016 by any resident person from income which is accrued in or derived from Kenya for the use or occupation of residential property, and which is in excess of two hundred and eighty-eight thousand shillings but does not exceed fifteen million shillings during any year of income

Income Tax Act

Rental Income Tax Rate

The tax rate is 10% on the gross rental income. Any person whether a company or a business earning rentals between 288,000 per annum ( Ksh 24,000 per month) and 15 Million per annum ( Ksh 1,250,000) is required to file monthly rental income tax by the 20th of every month. This is regardless of the size of the building, location of the property- rural or urban, material –timber or concrete stones.

“  The rate of tax in respect of residential rental income shall be ten percent of the gross rental receipts of a taxable resident person under section 6A”

Exemption for Monthly Rental Income Tax

Monthly Rental Income Tax is exempted for the following Categories :

1. Where the Annual gross rentals exceed the Ksh 15 Million Threshold
2. Non-Resident Tax Payers
3. Taxpayers who wish to continue with the current tax regime on rental income where they file Annual returns may elect to do so by writing to the Commissioner.

where Rental Income Rentals exceed 15M

Where the gross rental income exceeds ksh15 million per annum, the landlord should notify the KRA commissioner.

At the end of the accounting period, landlords are required to prepare a rent schedule for all to-let property accounting for all gross rent received and all the expenses incurred on the property. The completed tax should be declared within six months.

Filing Period for Rental Income Tax

Filling for the rental income should be done monthly. It is deemed that the rent is collected monthly and where actual rent has not been collected the landlord should file nil returns. Where rent is collected 10% of the gross rent should be paid to KRA, and it’s the final tax. We help in filing tax returns for taxpayers you can contact us for the service.

 

For commercial rental income, VAT obligation is also required to be disclosed and filled. More on VAT here

Enforcement of Rental Income Tax in Kenya

The government in a move to enforce compliance with the Rental Income tax has introduced several measures. One is withholding tax on rentals where an appointed tax agent can withhold part of the rent and remit it to KRA.

On the other hand for commercial rental property, for a business that has rented office space to claim rental expenses while filing its annual corporate tax returns, it is required to disclose the details of the landlord such as the KRA pin.

Also, the taxman may get data from the electricity provider KPLC for taxpayers’ details who have requested to be supplied power at their rental properties. Such a measure enables KRA to determine people earning from rental income even when they don’t personally declare it.

Penalties for Rental Income Tax

 Late filing of MRI returns attracts a penalty of:

• 2,000 or 5% of the tax due whichever is higher for individuals
• 20,000 or 5% of the tax due whichever is higher for corporates

Penalty on late payment:

• 5% of the tax due and 
• late payment interest of 1% per month on the unpaid tax until the tax is paid in full.

Rental Property Templates

You can download the following Templates from this website.

1. Draft Tenancy Agreement

You can use the template in drafting an agreement for your Tenants.

2. Landlord’s Tenants Invoicing Template

A template that the landlord can use to generate Tenant’s Invoices and also Tenants Profile Biodata.