Rental income not deductible expenses LHDN tax rate

What are the 3 taxation traps if you own property for rental income?

Trap 1:

Rental income for residential property or non-business sources is often confused as an investment. Hence making it exemptible from taxation. But,  In fact , it is TAXABLE income by LHDN !  (non reporting risk being penalised under section 113  under the Income Tax Act 1967. This is because it is a serious violation to under-declaring or not declaring your rental income at all).

Regardless if the rental income comes from a self-purchased property or if the property was inherited, you have to report the income made from renting out your property.

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”.

This means that the income gained from renting out a property as a non-business source has to be declared. This is applicable when the tenants get passive support in the form of  maintenance services from the property owner. A good example would be using the building facilities like swimming pools, and gyms on property grounds.

Trap 2:

Starting from 1 January 2020. The LHDN has announced that the property rental in Malaysia is taxed at highest 24% rate (sdn bhd). Property rental income is calculated on a net basis. This means that finalised earning is obtained after deducting direct expenses (assessment, quit rent, upkeep & repairs etc)

Other expenses eg salary, upkeeps, accounting, audit, co sec etc cap at 5% of total rental income of the year.

How do we calculate net rental income?

Example:

Monthly rental received : RM2,000.00
Property annual assessment tax : RM1,000.00
Quit Rent : RM100.00
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
= 15,900

Direct Expenses deductible for landlords with rental properties:

These are the following 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

It is important to note that in order to claim these tax exemptions, there must be a legal tenancy agreement for the rental property.

Trap 3:

Not Tax Deductible Expenses for First Tenant (tax add back)

Initial expenses, better known as the cost of obtaining your first tenants are NOT allowed for deduction. Even there are DIRECT “First-Tenant Costs” are :

  • Advertising fees not tax deductible expenses
  • Legal feesnot tax deductible expenses
  • Stamp dutiesnot tax deductible expenses
  • Real estate agent commission feesnot tax deductible expenses
  • Repairs for property into tenantable conditionnot tax deductible expenses

Tax Incentives on property and rental income in 2020:

Under Budget 2020, the government has proposed multiple financial incentives.

One of 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 and is priced up to RM500,000.00. This scheme works by letting the tenant rent a property for up to 5 years with the option of purchasing the property based on the fixed price when the tenancy agreement is signed.

The Youth Housing Scheme has been extended until December 2021. This Scheme provides a 10% loan guarantee through Cagamas to enable borrowers to full financing. A RM200 monthly instalment assistance is provided for the first 2 years but for 10,000 home units only.

Rental income | not tax deductible expenses | LHDN tax rate | tax Add back
LHDN Tax treatment -What are the 3 taxation traps if you own property for rental income? Beware for Non-Deductible expenses for First Tenant’s rental income

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