The Tax Implications of Buying and Operating Real Estate in Kenya
Article by: Sarah Khasoa
Date: Thursday, 18th July 2024
Purchasing or selling a property in Kenya often turns out to be an intensive process, especially due to the documentation and expenses that come with processing the requisite paperwork. As such, you may want to familiarize yourself with additional charges and levies that go hand in hand with the purchase. Some of the inevitable charges you will encounter in your property purchase are taxes. These taxes include:
Stamp Duty: This levy is computed as 4 percent of the property value plus 40 shillings and is subject to valuation and assessment by a government valuer.
Value Added Tax (VAT): VAT is an indirect tax you pay upon consumption or purchase of taxable goods or services supplied in Kenya. It is computed at 16 percent of the value of the goods or services purchased. In Kenya, land and residential buildings are not subject to VAT. However, commercial buildings are subject to VAT. VAT may also be levied on additional charges you may be required to pay along with your property purchase. These include the cost of transfer or allotment of shares in the property management company (For apartments and gated communities), and handling charges as pertains to financed purchases, as well as legal fees payable to the vendor’s advocate.
Capital Gains Tax: This is a tax paid by a seller on any value appreciation of a property on its transfer and is computed at 15 percent of the net gain.
Legal and Registration Fees: Legal fees are monies paid either to the buyer or seller’s advocate to facilitate the preparation and processing of legal documents such as offer letters and sale agreements to facilitate the property transfer. The legal fees often vary from one advocate to another but average at 1 to 3 percent of the property value.
The advocate facilitates the transfer of the property at the land registry. The transfer process includes assessment of the instrument of transfer of stamp duty, and the assessment of the stamp duty which is computed at 4 percent of the property value.
So as the owner of a real estate property in Kenya, what can you expect from a tax perspective? As a property owner, you are required to meet various property tax obligations. These may include:
Land Rates (Property Tax for apartment owners in Nairobi): For residential properties within Nairobi, unit owners are expected to pay a Property Tax of 0.115% of the property value as per the County Government of Nairobi Finance Act of 2022. Deadline for payment of this tax is March 31st.
Rental Income Tax: As a landlord, you would be expected to account for any tax on rental income received minus the expenses that were incurred in generating the rental income. Individuals are taxed at 7.5% on the gross rent received by residents, while non-resident individuals pay a rental income tax of 30%. Resident and non-resident corporate entities are taxed at a rate of 30 percent as per current rates. Landlords are required to pay and file their returns before the 20th day of the month following receipt of rent dues.
Tax Reliefs for Residents
Personal Relief: As a resident property owner in Kenya, you can enjoy some reliefs or reductions on your rental income tax returns. For instance, you can claim up to KES 28,800 annually as tax relief on your income tax. Non-residents are however, not entitled to any tax relief in Kenya.
Affordable Housing Tax Relief: This relief is applicable to those who qualify to purchase a home under the affordable housing scheme. The relief is computed at 15% of the employee’s contribution, capped at KES 108,000 annually or KES 9,000 monthly.
Mortgage Interest Relief: Mortgage interest relief is available to owner-occupied properties and is currently capped at KES 300,000 annually.
What you need to know as a foreign real estate investor in Kenya
As a foreign real estate investor in Kenya, not only are you bound by the aforementioned tax regulations, but you may also be subject to double taxation treaties. Double taxation is a scenario whereby income tax is applied twice to the same source of income. Most often than not, this happens when income is taxed both at the corporate and personal level or the same income may be taxed in two different countries. Double taxation often occurs because companies are considered as separate entities from the individuals who own them. Hence, when dividends are paid to the shareholders, they may attract tax even though the income that was used to pay the dividends has already been subjected to tax at the corporate level.
Repatriation of profits by foreign investors
If you are a non-resident individual in Kenya, any repatriated income accrued or derived in Kenya will be taxed at a rate of 15%. Similarly, branches of foreign companies are also expected to pay a repatriation tax of 15% in addition to the 30% corporate tax. However, corporate entities stationed in any of the country’s designated Special Economic Zones (SEZ) may enjoy special tax rebates or reductions if they are able to meet the set SEZ criteria. These include rebates on corporate tax, VAT, and even on repatriated income.
So how can residents and non-residents ensure compliance with the tax regulations of the country? Primarily, you need to register for a Personal Identification Number (PIN) on https://itax.kra.go.ke/KRA-Portal/ . A guide to PIN registration is outlined on the website. Alternatively, you may visit your nearest Kenya Revenue Authority (KRA) branch for assistance in registering or obtaining a PIN.
For foreign investors, they are required to provide additional details or documentation before a PIN can be issued. In this case, you may want to enlist the services of a tax advisor or consultant to assist with your PIN registration and filing of your monthly or annual tax returns.
Upon successful PIN registration, you will be required to be up to date with your tax returns, failure to do so will attract a penalty. For individuals, late filing of returns attracts a penalty of KES 2,000 or 5% of the tax whichever is higher. As for corporates, late filing of returns attracts a penalty of KES 20,000 or 5% of the tax, whichever is higher, while late payment interest is 1% per month or part of the month.
As a registered taxpayer, it is important to stay abreast of the latest changes in tax regulations through extensive research. Detailed information is available on the KRA website portal. You may also find useful tax compliance information on other web resources, such as https://taxsummaries.pwc.com/ which is basically a database of worldwide tax regulations and updates published by Price Waterhouse Coopers (PWC).
Summary
In a nutshell, property owners in Kenya are expected to pay various property taxes. These include Value Added Tax, Stamp Duty, Capital Gains Tax, Land Rates, and Rental Income Tax. Resident property owners can enjoy some special tax reliefs such as Personal Tax relief, Affordable Housing Tax Relief and Mortgage Interest Relief for owner-occupier properties. Non-resident individuals and corporates on the other hand, are required to pay tax on repatriated income accrued in Kenya.
In order to ensure utmost tax compliance for property owners, PIN registration and timely filing of tax returns are key. Property owners also need to keep themselves updated on the latest changes in tax regulations through extensive research.
At Centum Real Estate, we are dedicated to providing you with updates on everything real estate related in Kenya. We provide free training and coaching to individuals, groups and chamas among others on the various factors of investing in residential properties including, taxes. If you would like more details on the tax regulations that apply to property owners for yourself or your group, contact our team via email at centum.re@centum.co.ke, call +254 747 019 977 or fill out the form here to schedule a session.
Edited by: Frida Nthoki- Marketing Department