Rental Income and Investment Deductions
Income Tax
Rental Income and Investment Deductions
Syllabus tag: KASNEB CPA | Advanced Level | CA35S1 Advanced Taxation
1. Taxation of rental income
Rental income from property in Kenya is a distinct source of income, taxed separately under the ITA. Individuals pay tax on net rental income at their marginal income tax rate. Residential rental income tax (introduced in 2016): a simplified regime for individuals earning gross monthly rental income between KES 24,000 and KES 288,000 per month (i.e. KES 288,000 to KES 3,456,000 per year) — flat rate of 10% of gross rental income (no deductions allowed). Above the upper threshold, normal income tax applies on net rental income.
2. Allowable deductions for rental income (normal basis)
Gross rental income X
Less allowable deductions:
Mortgage/loan interest (loan to acquire property) (X)
Ground rates and county levies (X)
Insurance premiums on the property (X)
Repairs and maintenance (revenue nature) (X)
Agent fees and management charges (X)
Advertising for tenants (X)
Capital allowances on qualifying improvements (X)
Net taxable rental income X
Not allowable: depreciation, capital expenditure, personal expenses of the owner, loan principal repayments, expenses relating to periods of non-rental use.
3. Distinguishing repairs from improvements
Revenue repairs (allowable): restore property to its original condition — painting, plastering, replacing worn-out fixtures. Capital improvements (not allowable as repairs): enhance or extend the property — adding a new room, replacing a roof with a better structure. Capital improvements may qualify for capital allowances (e.g. 10% investment deduction on commercial buildings).
4. Capital allowances on rental property
Investment deduction: 10% per annum (straight-line) on the cost of commercial buildings. Available on construction or purchase of qualifying commercial buildings — not on land component. Wear and tear: on plant and equipment used in connection with rental operations.
5. Losses from rental income
A rental loss in one year can be carried forward and offset against rental income in future years. Rental losses cannot be offset against income from other sources.
6. Withholding tax on rental payments
Where a company, partnership, public body, or employer pays rent to any person for the use of immovable property in Kenya, withholding tax must be deducted at 10% of the gross rent and remitted to the KRA by the 20th of the following month. This WHT is a credit against the landlord's final tax liability.