The Kenya Revenue Authority (KRA) recently launched its 8th Corporate Tax Plan with key focus being the implementation of the Tax Base Expansion strategy which seeks to recruit new taxpayers. KRA’s target is to recruit 2 million new tax payers and to audit perennial tax payers who have been filing nil returns. To achieve this target, the KRA has identified persons involved in the real estate sector as being integral to the achievement of its goal.
Introduction to taxation of the real estate business
The real estate business in Kenya is generally divided into two: commercial and residential divisions. In general, the following taxes would be applicable to persons engaged in the buying and selling of property: stamp duty, capital gains tax, income tax.
Stamp duty tax
Stamp duty is payable on the transfer of real estate by the buyer at 4% of the assessed value for properties within a municipality. A rate of 2% of the assessed value is applicable to properties outside a municipality. Stamp duty is payable by the purchaser.
Capital gains tax
Capital gains tax is applicable at the rate of 5% of the amount by which the transfer value of the property exceeds the adjusted cost of the property. The adjusted cost of the property would include among others: the cost of the land, the cost of defending the title to the land and other supported costs. Capital Gains Tax is payable by the seller.
Income tax
Dealing in real estate would lead to income tax implications where the property is deemed to be held for trade and not investment purposes. The following actions would indicate that property is being held for trade purposes:
- Profit motive – which indicates that the seller’s objective was to acquire land and sell it at a profit without any intention of holding it for profit;
- Modification of asset – modification of an asset in order to make it more sellable; and
- Length of ownership – short period of ownership in between purchase and sale;
Therefore, on the above basis, income tax would be payable at 30% of the taxable profits as opposed to a 5% capital gains tax.
In conclusion: in light of the Kenya Revenue Authority’s (KRA) 8th Corporate Plan which seeks to raise compliance among persons engaged in the real estate business, it is important that taxpayers regularize their tax compliance and take advantage of the voluntary tax disclosure programme (VTDP).
CM Advocates has a fully-fledged tax law advisory business unit that offers a vast range of tax services. Our highly qualified and experienced personnel will assist you with your tax matters and ensure that your business is tax compliant and assist you to analyse and mitigate any tax risks or exposure.
For more information and assistance on the above, please contact our tax advisory team through email at taxteam@cmadvocates.com.
