3 Common Taxation Misconceptions About Rental Income
Property owners must declare the income made from renting out their property.
Rental income for residential property or non-business sources is often mistaken as an INVESTMENT hence making it an exempted from taxes. When in actual fact, this rental income is taxable by LHDN. Failure to report this income, poses risk of being penalised under section113 under the Income Tax Act 1967. Regardless of how you came to own the property, if it was inherited or self-bought, the income must be declared.
It is stated Under Section 4D, Income Tax Act 1967, “The letting of real property is treated as a non-business source and income received from it is charged to tax under paragraph 4(d) of the Income Tax Act 1967 if a person lets out the real property without providing maintenance services or support services (such as cleaning services and repairs services) comprehensively and actively”.
In summary, income gathered from renting a property as a non-business source has to be declared. This is applicable when the tenants receive passive support from the landlord in the form of maintenance services. An example of passive support would be building facilities like swimming pools and gyms.
As of 1st January 2020, LHDN has announced that property rental in Malaysia is taxed at 24% and property rental income is calculated on a net basis. Net basis calculation is based on the finalised earning after the deduction of direct expenses like assessments quit rent, upkeeps and repairs.
Other types of expenses like salary, accounting, auditing, co sects are caped at 5% of total rental income of the year.
How is net rental income calculated?
|Monthly rental received||:||RM2,000.00|
|Property annual assessment tax||:||RM1,000.00|
|Cost of damage repairs for property||:||RM7,000.00|
|Net Income||=||Rental Income – Permitted Expenses (Assessment Tax + Quit Rent + Repairs for Damage)|
|=||(2,000 x 12) – (1,000 + 100 + 7,000)|
|=||24,000 – 8,100|
Example of direct expense that are fully deducted from rental income:
- Fire / theft insurance
- Assessment tax / quit rent
- Interest on mortgage loans
- Expense to renew tenancy or to change tenant
- Maintenance fee for strata properties
- Upkeep & repairs
Tax exemptions are only applicable if there is a legal tenancy agreement for the rental property
Initial expenses are NOT tax deductible.
Initial expenses are the costs incurred when you obtain your first tenants. Example of initial expenses are:
- Advertising fees.
- Legal fees
- Stamp duties
- Commission fees for real estate agents
- Repairs made on property before tenants move in
New tax incentives for property and rental income in 2020:
The government has proposed multiple financial incentive in Budget 2020.
Among the incentives is a full duty stamp exemption for up to RM500,000 for the purchase of first residential home.
A rent-to-own scheme has been introduced for the purchase of new first home properties. This scheme allows tenants to rent a property for up to 5 years with the option of purchasing it based on the fixed price of when the tenancy agreement was signed.
The Youth Housing Scheme has also been extended until December 2021. The scheme provides a 10% loan guaranteed through Cagamas to allow borrowers to obtain full financing. A monthly instalment of Rm200 is provided for the first 2 years but it is limited to a 10,000 home units only.
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