Do You Own Rentals, and You’re Not Paying Tax?

The Kenya Revenue Authority (KRA) recently employed over 1,400 revenue assistants to boost tax compliance in the country. In September, the assistants started visiting shops and businesses nationwide to collect tax information and educate Kenyans about their tax obligations. 

Expanding its scope beyond the commercial realm, KRA has set its sights on landlords. On November 11th, the taxman carried out a sensitisation exercise in Nyayo estate in Nairobi to create awareness about rental income tax to landlords, and the KRA assistants undertook a data collection exercise on rental income properties. 

Looking ahead, the KRA revenue assistants are gearing up for an extensive door-to-door campaign, registering taxpayers and ensuring tax compliance, especially among landlords. If you own rental properties, you need to be ready for them when they come knocking. And that’s start by ensuring you pay your Residential Rental Income Tax.

What is Residential Rental Income Tax 

Residential Rental Income Tax is charged on payments received from a right granted to another person for the use or occupation of immovable property. Residential Rental Income Tax, popularly known as Monthly Rental Income or MRI, is charged on residential premises. 

MRI is payable by a resident person (individual or company) on rental income accrued or derived in Kenya for the use or occupation of residential property.

MRI tax is payable by landlords with an annual rental income of between Ksh288,000 (Ksh24,000 per month) and Ksh15 million (Ksh1.25 million per month). The MRI tax rate is 7.5%, effective 1st January 2024, on gross rent received and is the final tax (the current rate is 10% until 31st December 2024). No expenses, losses, or capital deductions are allowed for deduction from the gross rent. 

MRI tax returns are filled monthly, payable monthly, and should be remitted to KRA within five working days. However, by notice in writing to the Commissioner, you may elect not to be taxable under MRI, in which case the annual income tax regime shall apply to you.

If your rental income is above Ksh15 million per year, you will be required to declare the rental income together with incomes from other sources (if any) while filing your annual income tax returns. The residential income tax rate is 30% for individuals and local companies. However, in this case, the taxpayer will be allowed to reduce the tax liability with expenses incurred to derive the rental income, such as the cost of repairs and insurance.

MRI tax applies to individuals and corporations with residential property only. Therefore, if you own a commercial property or you are a non-resident landlord, you are exempted from MRI tax. You will be required to pay rental income tax under a different regime. 

How is Rental Income Filed and Paid?

To file and pay your rental income tax, you first need to register your property for MRI tax. You can do that by following these steps. 

• Login to your iTax portal. MRI Registration is done online at https://itax.kra.go.ke. 
• Go to the “registration tab” in the dashboard, and from the dropdown menu, select the last option, “Register Property Details”, and click on Next.
• You will be shown two sections: section A, which has your auto-filled details, and section B, which you should fill depending on the property type. There are three options to choose from: new, update, and deregister property. Choose the first option to register a new property.
• Next, you will need to fill out a PIN of a tenant of the said property. Once you enter the correct PIN, the system will auto-populate the name of the taxpayer.
• Next, fill out the needed details of the new property, enter an “estimated monthly rental income”, then click on ‘add’.
• Next, enter any remarks under ‘Application Remarks’ and click ‘Submit.’ You will receive an ‘Acknowledgement Receipt’ for registered property details, which you can download.  

How to file MRI returns:

1. MRI returns are submitted online via iTax: https://itax.kra.go.ke
2. Go to the returns tab on your dashboard and click ‘File Return.’ 
3. Select the obligation “Income Tax - Rental Income” and click on it. There are two sections:

Section A

• Select whether you are filing an Original Return or an Amended Return.

Section B

• The total number of properties will be auto-populated based on the number of properties you have registered. If for none, this field will need to be entered.
• Next, enter your monthly rental income. 
• The system will automatically compute the tax on the rental income.
• Where you have any rental withholding certificates and credits for the month in reference, the system will auto-populate. The tax due will also be auto-calculated, factoring in all the credits where any apply.
• Next, click the ‘Submit ‘ button to submit your return. 

NOTE: MRI is a final tax; therefore, persons are not required to declare the same in their annual income tax.

How to pay for MRI

After filing the MRI return, generate a payment slip as follows; 

1. Log into your iTax portal via https://itax.kra.go.ke 
2. Go to the ‘Payments’ tab and select ‘New Payment Registration’. 
3. Select the tax head as “Income Tax” and the Tax sub-head as “Income tax -rent.”
4. Select the payment type as Self-Assessment Tax if the return has already been filed and proceed to enter the tax periods (year and month).
5. After selecting the radio button, click the ‘Add’ button and select the payment mode you want to use.
6. Click ‘Submit’ and retrieve a unique payment registration number, which will be used for mobile payments or bank payments.

What Happens If You Commit a Rental Income Tax Offense?

To ensure compliance with the income tax laws, you will face the following penalties for not registering, filling, and/or paying your MRI tax. 

• Late filing of MRI returns attracts a penalty of Ksh2,000 or 5% of the tax due, whichever is higher for individuals, and Ksh20,000 or 5% of the tax due, whichever is higher for corporates. Filing MRI returns is compulsory. For months, when your rental unit is vacant, you must file a nil return. 
• Late payment penalty is 5% of the tax
• Late payment interest is 1% per month or part of the month.
• Failure to register as a taxpayer: Ksh100,000 per month or part of a month for the period starting from the month the person was first required to apply for registration and ending on the month immediately before the month he submits an application for registration.
• Failure to keep records necessary for determining tax: 10% of the amount of tax payable or Ksh100,000, whichever is higher. 
• Failure to notify the Commissioner that your rental income will likely exceed the Ksh15,000,000 upper limit: A fine not exceeding Ksh100,000 or imprisonment for a term not exceeding six months or both. 

Voluntary Tax Disclosure Programme For Landlords

This is a program where you can confidentially disclose tax liabilities previously undisclosed to KRA to be granted relief of penalties and interest of the tax disclosed. The program started on 1 January 2021 and is set to end on December 31, 2023.

Suppose you own rental properties and haven’t registered to pay MRI or filed rental income returns. In that case, you can use this program to disclose any undisclosed MRI tax and pay without facing punitive penalties and interest.

If you apply for this program and the taxman is satisfied with the facts disclosed in the application, you shall be granted a relief of the interest and penalties by up to 25%. However, the disclosure must be made and tax liability paid before 31st December 2023.

WRAPPING UP

According to the Nation, KRA will be taking measures to ensure the implementation of rental income tax by mapping rental properties through enhanced field data analysis, integration of iTax (system) with the National Lands Information Management System, and use of a mobile App to make filing and paying MRI tax easier. The taxman will be taking this measure to ensure all landlords are paying their fair share of income taxes. 

Understanding and fulfilling your tax obligations as a rental property owner is a legal necessity and a crucial aspect of responsible property management. Finally, if you hit a roadblock or need more info, consider contacting KRA through their official channels or seeking guidance from real estate tax professionals.