Comments to answers

Hi. If someone has bought a house on mortgage and monthly payment to the bank is 70,000 she has a tenant, gets house rent for 45,000 only. She then is forced to top up the 25,000 to meet the bank target. This is already a loss on her part coz she's still paying to own it fully. Should she pay KRA for not filling the returns for the house......it's s weird state let me know.. from Emma

Rental Income

BACKGROUND

The characteristics of a MORTGAGE is that the EARLY years of repayment have a BIGGER component of interest THAN principal. In addition average rent from a mortgage property is about 5%-8% of the buying price.

TAX PLANNING

The Income Tax Act cap 470 s.6A requires that, from January 2016, if annual rental income is kshs. 10m and BELOW, a MONTHLY tax called a Residential Rental Income Tax (RRIT) of 10% of the gross rent shall be payable by the 20th of the month following that which the rent relates. In your case kshs.4500/- was due for the last 8 months.

Tax AVOIDANCE Strategy

All is NOT lost. This whole amount can be avoided as s.6A has an ESCAPE CLAUSE in which a taxpayer may WRITE a letter to KRA to request that TAX on rental income be calculated using the TRADITIONAL method from Jan 2017.

In your case this would result in losses since interest paid + other expenses would be higher than the rent received and hence no tax payable for a long long time to come.

Is this tax applicable to limited companies?

w.ww.

?????? @ John Three claps

Well explained cpa John

Yes.She will have to pay a penalty for not filing a return but this is in case she has been doing so previously.

CPA Mwangi I think the law anticipated this and thats why they gave the two alternatives. Its our job to give expert advise/tax planning on the best alternative an individual can take.

Tax is now 10% of the gross rent.if she chooses to compute the net profit and compute tax its ok.a loss will occur if the mortgage interest is higher than 45k per month. The interest plus other expenses

She will have to pay penalties for not filling returns. For income tax she's not liable as she made losses.