Real estate is among the most preferred investment options because it offers steady returns and is less affected by market volatility. However, for an investor to succeed in this field, it’s crucial to have a clear understanding of the prevailing tax regulations set by the Kenyan government. Locally, most real estate investments fall into either residential or commercial categories. Both sectors are lucrative, offering investors rental income and the opportunity to build equity over time. The taxes required from investors vary depending on the specific type of tax. This article explores the different taxation frameworks that apply to real estate in Kenya.
1. Capital Gains Tax (CGT)
Capital Gains Tax is levied on the profit (net gain) from the sale or transfer of property, including land, buildings, and shares. It applies to both residents and non-residents. Rate: As of January 1, 2024, the CGT rate is 15% of the net gain, increased from 5% following the Finance Act, 2022.
Calculation: Net gain is calculated as the difference between the transfer value (sale price minus incidental costs like legal fees) and the adjusted cost (acquisition cost plus improvement costs and incidental acquisition costs).
Exemptions:
Transfers between spouses or as part of divorce settlements.
Transfers to secure a debt or loan (e.g., using property as collateral).
Transfers to immediate family members (in some cases).
Properties held for less than three years as a primary residence or agricultural land under 100 acres outside municipalities.
Payment: CGT is due upon completion of the property transfer or receipt of the full purchase price, whichever is earlier.
2. Stamp Duty
Stamp duty is a tax paid by the property buyer on the transfer of real estate to register the transaction with the government. It’s 4% of the property’s assessed value for properties within municipalities (urban areas) and 2% for properties outside municipalities (rural areas).
Payment Deadline: Must be paid within 30 days of the transaction. Failure to pay invalidates the transaction and renders the agreement null in court.
Exemptions: Certain transactions, such as those involving Real Estate Investment Trusts (REITs), may be exempt.
3. Rental Income Tax
This tax applies to income earned from renting residential or commercial properties. The tax regime depends on the landlord’s residency status and income level. Here we have the Residential Rental Income Tax, which applies to resident landlords earning annual rental income between KSh 288,000 and KSh 15 million. Rate: 7.5% of gross rental income (effective January 1, 2024, reduced from 10%). Payable monthly, with returns filed via the KRA’s iTax portal. Landlords can opt out of MRI and be taxed under the normal income tax regime, which allows deductions for expenses. There is also the Normal Income Tax: this applies to landlords earning above KSh 15 million annually or those with commercial properties.
Residents: Taxed at progressive individual rates (10%–30%) or corporate rate (30%) after deducting allowable expenses.
Non-residents: Subject to a 30% withholding tax on gross rental income, which is a final tax. Tenants are responsible for deducting and remitting this tax to KRA by the 20th of the following month.
VAT on Commercial Rent: Rent from non-residential (commercial) properties is subject to Value Added Tax (VAT) at 16%, unless exempt (e.g., low-cost housing or residential leasing).
4. Property Rates (Land Rates)
Property rates are levied by county governments on both residential and commercial properties to fund local services like garbage collection, street lighting, and road maintenance.
Rate: Varies by county and is based on the property’s annual value or market value. For example, in Nairobi, the rate is 0.115% of the property value (as per the Nairobi County Finance Act, 2022).
Payment: Typically due annually, with deadlines varying by county (e.g., March 31 in Nairobi).
5. Annual Land Rent
Description: This applies to leasehold properties and is paid to the Ministry of Lands and Physical Planning.
Rate: Varies based on the property’s location and terms of the lease.
Purpose: Funds land administration and is distinct from county property rates.
6. Income Tax for Property Trading
Description: If a property is held for trading purposes (e.g., bought and sold for profit) rather than investment, the profit is subject to income tax instead of CGT.
Rate: 30% of taxable profits for residents (individuals or companies). Non-residents pay 30% withholding tax on gross income.
Deductions: Allowable expenses (e.g., improvement costs) can reduce taxable profits.
7. Value Added Tax (VAT)
VAT applies to the sale of commercial properties and residential properties sold by developers.
Rate: 16% on the transaction value, unless exempt (e.g., residential leasing or low-cost housing).
Exemptions: Land transfers, residential leasing, and certain low-cost housing projects are VAT-exempt.
8. Tax Incentives and Exemptions
Real Estate Investment Trusts (REITs):
Exempt from income tax and VAT on rental income from real estate assets.
Exempt from CGT on the disposal of immovable property or shares in another REIT.
Subject to reduced withholding tax rates for resident investors.
Special Economic Zones (SEZs): Reduced tax rates or exemptions for investments in SEZs, affordable housing, or tourism-related developments.
Double Taxation Agreements (DTAs): Kenya has DTAs with several countries to prevent double taxation of income (e.g., rental income or capital gains) for foreign investors.
9. Tax Compliance and Administration
Registration: Property owners and investors must register with the Kenya Revenue Authority (KRA) and obtain a Personal Identification Number (PIN) for tax filing.
10. Special Considerations for Foreign Investors
Foreign investors are subject to the same taxes as residents, including CGT (15%), stamp duty (2–4%), and rental income tax (30% withholding for non-residents).
Non-resident landlords’ tenants deduct and remit the 30% withholding tax on rental income.
Repatriated income is taxed at 15% for non-residents or branches of foreign companies.
DTAs may reduce tax liabilities for investors from countries with bilateral agreements.
Restrictions: Foreigners face limits on land ownership (e.g., cannot own freehold agricultural land), impacting investment decisions.
Recommendations
Regional Comparison: Kenya’s CGT rate (15%) is lower than Uganda (30%), Zimbabwe (20%), and South Africa (18–21.6%), enhancing its appeal to investors.
Budget for Taxes: Include CGT, stamp duty, rental income tax, and property rates in financial planning to avoid surprises.
Seek Professional Advice: Engage tax consultants or real estate lawyers to navigate compliance and leverage incentives like DTAs or SEZ benefits.
Record-Keeping: Maintain accurate records of property costs, improvements, and rental income for tax calculations and compliance.
Stay Updated: Monitor KRA announcements and legislative changes (e.g., via the KRA website or tax professionals) for updates on rates or exemptions.
