KRA pressure on landlords signals further rent increases

“The commissioner has noted that your rental income has been a constant or slightly decreasing figure during the periods presented,” the KRA said in one of the notices sent in April and seen by the Commercial newspaper.

“We understand that rent is an asset that is valued in economic times and we hope that your returns for the current month reflect that and, if any previous return return can be amended as necessary, filing a nil return or a decrease in rental income”.

While the move is intended to unmask landlords who have underreported their rental income, it is also likely to hurt genuine landlords struggling with homes remaining vacant at a high rate and price-sensitive tenants moving out. quickly move out of their homes when rents rise.

A rent increase appears set to hurt workers who have seen their wages inflated in recent years, leaving them with weakened disposable income.

This sets the stage for new friction between the KRA and landlords, who argue that the weak economy has made it difficult for landlords to raise rent without facing tenants leaving.

Starting in January, landlords were expected to pay a monthly income tax at a rate of 7.5 percent of the gross rent they charge tenants.

This tax applies to people who earn an annual rental income of between Sh280,000 and Sh15 million or at least Sh23,300 per month.

The tax applies to gross rental income and landlords cannot deduct expenses and losses or make capital deductions.

Previously, landlords paid a 10 percent tax on rent after deducting expenses such as mortgages and renovations.

One of the landlords targeted by the notice has three apartments in Mlolongo, Machakos County.

Consider that you have been paying monthly income tax (MRI) to the KRA for several years.

“Rental income increases when I have a new tenant, but not when they have been there for a long time. Getting a constant tenant is not easy, that’s why I don’t raise the rent,” the landlord said on condition of anonymity for fear of reprisals from the KRA.

“In the urbanization where I have my apartments there is an excess of apartments so the rent is a constant figure. “If you are the only landlord raising the rent, you will automatically transfer your tenants to other properties.”

A survey by Hass Consult, a real estate company, shows that rents have increased more than fourfold since 2001.

The pace of rent growth in Kenya has slowed in recent years, a sign of respite for renters after the skyrocketing increases of recent years.

Tenants had been hit by skyrocketing rental costs in recent years after a prolonged period of high demand and limited supply.

Some analysts have described the current residential real estate market as a buyers’ market, meaning that renters enjoy bargaining power over landlords. This happens when the market is saturated and buyers have a wide variety of options.

According to Johnson Denge, a real estate expert, an increase or decrease in rental income, whether from residential or commercial properties, is driven by factors such as vacancies, lease type, and property quality.

Denge says it is very difficult to raise rents on residential homes because most of them do not have binding leases.

“What happens is that rental income in a residential area increases when you have vacancy. When someone moves out, someone else moves in and rents can go up.”

The government has struggled to meet its rental revenue collection target and has been hiring more real estate agents after a study revealed a projected shortfall of Sh27 billion in 2022.

In addition, the Finance Act 2023 introduced a provision for the appointment of rental income tax agents who shall collect and remit MRI tax to the KRA by the fifth business day after the deduction has been made.

Unlike the commercial real estate market, which had been hit by oversupply even before Covid-19, the residential market appears to be on a recovery path, with official data showing the value of residential buildings approved by the Nairobi County government in the first 11 months of last year exceeded pre-pandemic levels by Sh35.4 billion.