Brace yourselves for higher rents

What you need to know:

  • “I propose to simplify the taxation regime for landlords owning residential property by taxing their gross rental income at 12 per cent for gross rental income below Sh10 million per year,” he said during his budget speech last week.
  • However, the landlords are concerned about how the tax will be administered, given the fluid nature of the business, with tenants coming and going indeterminately, and some houses remaining unoccupied for some time.
  • He added that many landlords had no records of the costs involved in maintaining a building and could not make the necessary calculations. As a result, they could not determine the amount of tax to pay.

Some landlords are considering raising rents for their tenants once the Kenya Revenue Authority (KRA) starts levying rental income tax.

The Treasury last week announced that the tax would be paid at a flat rate of 12 per cent of gross income, thereby removing the tax administration hurdles that have prevented KRA from fully rolling out the revenue stream.

John Wainaina, who owns 20 single-room units in Dagoretti for which he charges Sh5,000 a month, said he was considering adding Sh500 to each tenant’s rent to cushion himself against the drop in revenue.

“I suppose one or two might move out, but for these kinds of houses, I’ll still be charging the average rent,” he said.

Meanwhile, Geoffrey Kimani, who owns 13 bedsitters, is also contemplating raising the rent but is more reluctant to do so, with the change coming just months after he installed prepaid metres for the tenants.

“I used to pay for power in bulk, which is cheaper, but I was told I had to connect each tenant individually,” he said. “Now they pay the electricity bills themselves. I think some of the money I was using to pay for power can be redirected to KRA if they come calling.”

However, the landlords are concerned about how the tax will be administered, given the fluid nature of the business, with tenants coming and going indeterminately, and some houses remaining unoccupied for some time.

Treasury Secretary Henry Rotich did not elaborate on the details of how such issues will be resolved, only saying the shift to a flat rate from the more cumbersome method, where the income was taxed as part of the landlord’s income tax graduated according to the Pay As You Earn scale.

GROSS RENTAL INCOME

“I propose to simplify the taxation regime for landlords owning residential property by taxing their gross rental income at 12 per cent for gross rental income below Sh10 million per year,” he said during his budget speech last week.

This means that Mr Wainaina, who pockets Sh100,000 per month when all the units are full, will have to part with Sh12,000.
The law on property taxes came into effect in 2007, but the government began aggressively targeting landlords in 2012.

The 12 per cent flat rate addresses the challenges to landlords, some of whom do not know how to calculate the amount to pay, or to deduct allowable expenses.

In December 2014, KRA Commissioner-General John Njiraini said the institution had realised that the biggest problem in paying rental income was the complexities associated with calculating the cost of maintaining or putting up a building.

“Our objective is to make the payment of taxes simple. When we tried to find out why many landlords were not paying rental income tax, we found out that they didn’t even know where to start,” he said.

He added that many landlords had no records of the costs involved in maintaining a building and could not make the necessary calculations. As a result, they could not determine the amount of tax to pay.

Mr Rotich also granted a tax amnesty to non-compliant landlords although Mr Waithaka Wanjau, a landlord, said that it would have been better if the CS had given a waiver of all past tax dues.

“Most people would feel more compelled to pay if they were beginning on a clean slate and did not have to worry about huge bills from the past, “he said. “Besides, how will you determine how much one earned? Most of these people are very poor record keepers.”