Lots of people are trying to earn a few extra shillings by renting out a room in their home. As far as taxes go, this comes with bad news and good news.
The bad news is that the rent you receive is taxable income that you must report to the KRA.
The good news is that your taxable rental income can be wholly or partly offset by the tax deductions you’ll be entitled to.
See Also: What is Residential Rental Income Tax?
What is the Tax Rate?
The rate of tax is 10% on the gross rent received and is payable when landlords receive rent from their tenants either monthly, quarterly, semi-annually or annually. However, returns must be filed monthly.
No expenses, losses or capital deduction allowances shall be allowed for deduction from the gross rent.
Deductible Expenses
If you rent out a room in your home, the tax rules apply to you in the same way as they do for landlords who rent out entire properties. This means you get to deduct the expenses arising from your rental activity.
There is one big difference, however: You must divide certain expenses between the part of the property you rent out and the part you live in, just as though you actually had two separate pieces of property.
You can fully deduct (or, where applicable, depreciate) any expenses just for the room you rent, for example, repairing a window in the room, installing flooring, painting the room, or providing your tenant with furniture.
In addition, if you pay extra homeowners’ insurance premiums because you’re renting out a room, the full cost is a deductible operating expense.
Expenses for your entire home must be divided between the part you rent and the part you live in. This includes your payments for:
- mortgage interest
- repairs for your entire home
- improvements for your entire home
- homeowners’ insurance
- utilities such as electricity and water
- housecleaning or gardening services for your whole home
- trash removal
- security system costs, and
- association fees.
You can also deduct depreciation on the part of your home you rent.
How can I divide these expenses?
You can use any reasonable method for dividing these expenses. It may be reasonable to divide the cost of some items (for example, water) based on the number of people using them.
However, the two most common methods for dividing an expense are either based on the number of rooms in your home or based on the square footage of your home.
Be sure to keep good records of your deductible expenses when you rent out a room.
Note:
For any month that the landlord does not receive any rent he/she shall file a NIL return.
Residential rental income is final tax therefore, persons are not required to declare the same in their annual income tax returns.
Kenya Homes offers basic information, kindly consult with the right professionals for more detailed facts.