Every person who collects rent in Kenya pays tax. We have sampled frequently asked questions about this tax, which are as summarized below.
- What is Residential Rental Income Tax?
The Finance Act 2015 introduced a new Section 6A in the Income Tax Act Cap 470 Laws of Kenya, which provides for a simplified tax regime on rental income. The tax to be known as residential rental income tax shall be payable by any resident person from income which accrued in or was derived from Kenya for the use of residential property and which does not exceed ten million shillings (Kshs. 10 million) during any year of income.
- What is the effective date of the new Tax?
The new tax takes effect on 1st January 2016 and will apply to rental income received from calendar month January 2016.
The first return for January 2016 will be due on 20th February 2016.
- What is the rate applicable for the new simplified Tax?
Residential Rental Income Tax shall be charged at a rate of 10% of gross rent received on monthly basis. No expenses will be allowed for deduction.
- Will this be a final Tax?
Yes, the simplified tax at 10% will be a final tax. Landlords falling in this regime will not be subjected to further taxes on the residential rental income declared. In addition, eligible landlords shall not be required to file annual returns unless one has other incomes e.g. commercial rent, business income, farm income, etc.
- What is the threshold for the new tax?
The Residential Rental Income Tax rate will apply only for persons whose rental income does not exceed Kshs. 10 million during any year of income.
- When will the tax be payable?
The 10% tax on gross rent will be payable on monthly basis on or before the 20th day of the month following rent collection. Any tax not paid by the monthly due date will attract penalties and interest as specified in the current Income Tax Act
- Who is eligible for new tax?
- The tax shall be payable by a resident person (Individual and Company) effective 1st January 2016.
- It applies to rental income that has accrued or is derived in Kenya for the use of residential property.
- How will I compute the taxes due under this simplified tax regime?
Taxpayers are required to declare their monthly gross rent income and compute a final tax of 10% on gross rent.
This means that property owners shall not deduct any expenses incurred.
- Will all persons with rent income of up to Kshs. 10 million per annum be subjected to this flat rate?
Yes, the tax applies to all persons (Individual or Company) whose rental income from residential property is below the Kshs. 10 million per annum. However, landlords who wish to remain in the current tax regime can elect in writing to the Commissioner, to be taxed under the current tax rates.
Landlords who choose to remain in the normal tax regime shall pay instalment taxes and file annual returns as required.
- If I have both commercial and residential income can I join the simplified tax regime?
Yes, but the 10% simplified tax rate will only apply to income from residential property. Landlords earning Commercial rental income only will not be in this regime.
- Where one has both residential and commercial rental income, how will this be taxed?
Such landlords will be in both regimes. However, one may elect to remain in the current regime, in which case such a person will continue to file one return for rent from both sources.
- Will I be allowed to claim expenses incurred under the simplified tax regime.
No, under this regime no expenses will be deducted as the 10% rate applies to gross rent collected. If one wishes to claim expenses they can elect to remain in the current rental tax regime.
- If I am in the simplified tax regime, will it be possible to change to the normal tax rate?
Yes, if you are in the new tax, it will be possible to change back to the normal regime provided a taxpayer applies in writing to the Commissioner before 31st December each year. However, there will be no changing of regimes during the year.
- Will I be required to file annual returns while in the simplified tax regime?
No, you will not be required to file annual returns if you do not have other incomes. The simplified tax will be a final tax and will be declared and paid on monthly basis.
- If am in the simplified tax regime and the tenant is an appointed withholding agent and he withholds the tax upfront, will I be required to file a return?
Yes, you will file a monthly return and claim credit on withheld tax.
- How will I file my return?
o Eligible persons shall be required to file and make correct declaration through a simplified tax return via iTax System and pay tax by the 20th day following the month of receipt.
o Hence, the first return for rent received in January 2016 shall be expected to be filed by 20th February 2016.
o Return must be filed online via iTax as follows;
- Log on to kra.go.ke
NB: To file return and pay online, first register with iTax via the iPage facility at KRA website.
- Download the residential rental income tax return form (NB: the return can also be completed online without downloading).
- Fill-in your tax return.
- Upload the completed return/form.
- Generate the electronic payment slip to use in paying the tax at any KRA appointed bank or via Mpesa.
- To pay via Mpesa;
While generating the payment slip, select payment option of ‘cash’ and choose ‘bank’.
Use the KRA Pay Bill Number 572572 and the Account Number is the Payment Registration Number quoted at the top right corner of the generated Payment Slip.
- What are the exceptions for the Residential Rental Income Tax regime?
This tax regime will not apply to;
- Rental income from commercial property.
- Where a person who would otherwise pay tax under this regime elects by notice in writing to the Commissioner NOT to be subjected to the Residential Rental Income Tax.
- Non- residents (as per Income Tax Act definition) landlords.
- Landlords earning residential rental income of more than Kshs. 10 million per year.
- What benefits will I get if I take advantage of the simplified tax regime?
- Simplified tax computation at 10% flat rate on gross rent instead of the 10% -30% rates in the current regime.
- Landlords shall not be required to produce complex expense records to account for expenditure incurred.
- This will be a final tax thus landlords will not be required to file annual returns if they do not have other incomes.
- Compliance will be easy and cost effective.