Rental income is any income earned from the permitting another to use property that one owns or has rights over
•Arises from the renting of a house, apartments, rooms, space in an office building, or other real or moveable property
•The earning of rental income can be the core business of a person or can be incidental to their core business
In Kenya, there are two types of rental income depending on the purpose of occupation.
- Residential occupation.
- Commercial occupation.
The rental income from these two types of occupations is subject to income tax and VAT with exceptions.
Taxation is done on anyone in receipt of rental income unless they are tax-exempt. •Section3(2)(a)(iii) of the Income Tax Act (ITA) provides that income arising from a right granted to another person for the use or occupation of property constitutes income chargeable to tax
Where a person has several sources of income, the ITA provides for the taxation of rental income as a separate source of income
•Sec 6(1) of the ITA provides for the taxation of rental income: ‘gains or profits’ includes a royalty, rent, premium or similar consideration received for the use or occupation of property
•This may include: Advance rent Any amounts paid to cancel a lease; and Security deposits
Residential Rental Income
The residential rental income is the income that is derived from renting out residential properties for occupation. Though the income is derived throughout the period of occupation, it is the landlord who decides when they want to receive the rent.
However, for taxation purposes, rent is deemed to be received on a monthly basis. Hence, the tax period for residential rental income is one month. It is the period from the start of a calendar month to the end of the calendar month.
Taxation of Residential Rental Income
Income from residential occupation is taxable income. The total income to the landlord is what is taxable. The tax-ability of the income is irrespective of:
- Size of the buildings as long as the taxable income threshold is reached.
- Construction materials used in the buildings. A building can be made from stones, timber, soil, plastic paper-bags, cartons, branches, logs, leaves etc. The Kenya government will require the landlord to pay tax.
- Where the buildings are located e.g. in the high streets, in slums, suburbs, in forests, oceans, mountains etc.
- The age of the owners. It does not matter whether the building owners are below the age of 18 years. The managers of the properties are obligated to pay tax on behalf of the owners.
- How advanced in age the landlords are. Even if the landlords are one hundred and fifty years, as long as they have rental income derived from in Kenya, the income is subject to income tax.
a. Annual rental income less than kshs 10 million
The landlords pay residential rental income tax under a special category of tax specific to their needs. The taxpayers are not allowed any expenses or capital expenditure. It does not matter whether the taxpayers are individuals, corporate organizations, male, female, religious organization etc.
The tax rate under this special category is 10 % of monthly rental income. The tax is based on the gross rental income collection per month.
Tax Due Date
The tax due date is by the 20th day of the following month. The tax is paid by the registered taxpayer who in most cases is the landlord.
The residential income tax under this category is paid on a monthly basis. The month is from the start of the calendar month to the end of the calendar month.
Annual Tax Returns
There are no annual tax returns unless the taxpayer (landlord) has other sources of income to report.
Is this tax a final tax?
Yes, this category of residential tax is a final tax.