A client of mine once asked whether it is necessary for him to declare his rental income. The answer to that is a big YES!
Believe it or not, most new landlords I’ve worked with believe that rental income from residential properties or non-business sources is a form of investment instead of a taxable income. This results in them failing to report their rental income when submitting their tax files, only to be slapped back with back taxes that are double the amount.
Essentially, rental income tax is a tax imposed upon the profit earned by a landlord from renting out his/her properties. In Malaysia, taxpayers that are found guilty of underpaying their taxes shall subsequently be penalised under Section 113 of the Income Tax Act 1967.
The income upon which tax is chargeable under this Act is income in respect of rents, royalties or premium.
Section 4 (d), Income Tax Act 1967
What Kind of Tax Am I Chargeable For My Property?
If you’ve been working for a while, you should know that all Malaysians have to pay income taxes if he/she earns an annual income of more than RM34,000 (roughly RM 2,833.33 per month) after EPF deductions.
On the other hand, if you are a foreigner or expatriate earning a living in Malaysia for more than 182 consecutive days, you will be considered for taxes under Malaysian income tax laws and rates, just like any other Malaysian citizen.
If you think that personal income tax refers only to your employment salary or freelancing work, you will realise that you are pretty far from the truth.
Personal income tax includes all types of income made in a year, inclusive but not limited to one’s monthly employment salary. Any income made from a side hustle, rent, pensions, royalties, annuities, and so on, can be taxable if your personal income exceeds the minimum threshold for the assessment year.
With regards to real estate, an investor/landlord can be charged for the profits earned from selling and/or renting.
- Selling – The capital gain (otherwise known as profit) is chargeable for Real Property Gain Tax (RPGT) when the property is sold for higher than the purchase price. If you want to read in depth, head over to my article on a simple guide to RPGT in Malaysia.
- Renting – The rental income you earn from renting out your property is taxable. However, there are expenses where you can deduct again your rental income to reduce the effective taxable income.
How Does Rental Income Tax Work?
One thing you should know is that the renting of real estate property is treated as a non-business source if the property is rented out from the individual’s name.
Subsequently, the income received is taxable under paragraph 4(d) of the Income Tax Act 1967; The money you receive for passively renting out your property to a tenant is taxable. This is not in consideration of the maintenance works and additional services you may or may not provide to your tenant.
I understand some of you out there are of the intention of doing creating a co-living space where you provide extra services such as having an in-house chef and daily cleaning services. The income you earn on these is not considered under this section of the Income Tax Act.
Instead, such ventures should be considered a business income since you are actively providing these services on a regular basis to the same tenant. If you are interested to know more, you should seek out articles on tax planning for self-employment businesses.
In general, rental income tax is a tax imposed on the profit earned from renting out your properties, in which the taxable rent income is calculated based on its net basis. This income does not include the additional services that are provided with the renting of your space as it is deemed as an active income.
Do you need a simple explanation of all the chunky words above?
To put simply, the annual rental income you received is taxable using this calculation, the “final taxable amount = total annual rental income – permitted expenses”.
The expenses permitted for deduction is typically expenses spent on repairs, maintenance, insurance, quit rent, etc.
For instance, if you are earning RM25,200 of rental income in a year, but have spent RM10,000 on the permitted expenses. Thus, your net rental income would be RM15,200.
However, in situations where the permitted expenses incurred are more than the rental income earned, you will not be required to declare the RM25,200 rental income for that year of assessment (YA). This situation is also known as a rental loss because the rental income you earned is lower than the expenses on your rental property.
Don’t worry, we will go through a simple calculation later to help you understand.
What Happens If I Fail to Declare Rental Income Tax?
Now, it is no surprise for someone to fabricate their annual income just to avoid paying extra for rental income tax. But remember, evading tax is a crime, and when caught red-handed, you will have no choice but to bear its consequences.
According to Section 113 of the Income Tax Act, if you are caught falsifying your income earned in Malaysia and the effects. You will be liable to a fine anywhere between RM1,000 – RM10,000 and will be required to pay a special penalty, double the amount of tax that you failed to pay.
That’s why it is important for all investors and landlords to be aware of these miscellaneous responsibilities before diving into property investment. From my experience, these are things that you have to do your own homework since not all property agents will inform you about it.
In reality, not all the property agents you work with can advise you on the matter since they may not be property investors or landlords themselves. As far as their business is concerned, their income earned from brokering a deal is taxed under the self-employment section.
What Are the Exemptions for Rental Income Tax?
It was previously brought up that permittable expenses are income tax-deductible. Therefore, here is a list of the permittable expenses to help you have a better idea of what can and cannot be deducted from your net rental income.
Here is a list of tax-deductible expenses,
- Fire / theft insurance
- Assessment tax / Quit rent
- Interest on mortgage loans
- Expenses on rental collection
- Expenses on upkeep, repairs, and maintenance
- Property service charges, maintenance fees, and sinking funds
- Expenses on furniture and fitting, including replacing faulty appliances
- Expenses on tenancy renewal, including legal fees and stamp duty
- Expenses to change new tenant, including advertisement fees, property agent fees/commission
Do take note that in order for you to claim these tax exemptions, there must be a legal tenancy agreement for the rental property. It is also advisable for you to keep a record of the receipts for all the permitted expenses incurred.
On the other hand, it is a different story if you are renting your property to your very first tenant. Initial expenses before the property is rented out are not income tax-deductible. These expenses include:
- Advertising fees to get the first tenant
- Property agent fees/commision to obtain the first tenant
- Legal cost and stamp duty for intial tenancy agreement
- Expenses on renovation and improvement works to increase rental value or to attract potential tenants
Are there any special tax exemptions?
1. 50% tax exemption proposed under Budget 2018
Previously, a 50% tax exemption was proposed under Budget 2018 for statutory income of rental received by Malaysian resident individuals. Many landlords believe that they are still entitled to the tax exemption.
However, the truth is that the 50% tax exemption which was initially proposed for a period of 3 consecutive YA, from 2018 to 2020 is limited to the YA of 2018 only.
If you are reading this now, it is no longer applicable to you.
2. Economic Stimulus Package 3.0, Covid-19 pandemic period
After that, the Economic Stimulus Package 3.0 was introduced by the Malaysian government as an effort to boost the economy during the Covid-19 pandemic. The incentive offers a reduction or relief of rental payment by at least 30% of the existing rental rate for SMEs tenants from April 2020 to September 2020.
One thing to note, this is applicable only if your tenant has a registered SME (small, medium enterprise) business registration. Otherwise, there is no allowance for this.
Once again, it may not be applicable to you if you are the landlord for residential properties. Technically, you are not allowed to lease out your residential property for purposes other than residential living.
So once again, this is not likely to be applicable to you.
So why am I including this section?
I believe it is important to highlight the possible exemption made available by the government for different Malaysian budgets. As you’ve seen, the previous Budget 2018 had a special tax exemption to encourage landlords to rent out their residential property.
Similarly, in light of the COVID-19 pandemic, incentives were given out by the government to help the SME industry.
While we do not enjoy any special exemption now, that may not be the case in the coming years. So do keep your eyes on the new budgets released in the subsequent years.
Quick Examples on Taxable Rental Income
Assuming you are managing 2 rental properties on top of your permanent employment.
With the parameters listed below, here is a quick simple calculation to help you understand your taxable rental income,
| Property A | Property B | |
|---|---|---|
| Monthly Rental Rate | RM 2,500 | RM 3,100 |
| Lease Period | First tenant is from January to June (6 months); Second tenant is from September until December (4 months) | Tenancy is from January to December; No breaks in between |
| Effective Rental Months | 10 months | 12 months |
| Annual Rental Income | RM 2,500 x 10 months = RM 25,000 | RM 3,100 x 12 months = RM 37,200 |
| --Break-- | --Break-- | --Break-- |
| Expenses during the change of tenant | - 1 month for Agent's commission; RM 2,500 - Advertisement fees; RM 250 - Tenancy renewal stamp duty; RM 220 Total expenses is RM 2,970 | No expenses incurred within the year |
| Expenses on faulty furniture bear by landlord | To refurbish the place for new tenant; RM 5,000 | Small expenses for broken furniture; RM 500 |
| Expenses on monthly maintenance fees and sinking funds | Maintenance and sinking fund; RM 250 per month RM 3,000 in a year | Maintenance and sinking fund; RM 300 per month RM 3,600 in a year |
| Assessment fees and quit rent in a year | Estimated parcel rent is RM 1,200 Estimated quit rent is RM 50 Total tax per year is RM 1,250 | Estimated parcel rent is RM 1,450 Estimated quit rent is RM 70 Total tax per year is RM 1,520 |
| Other possible deductible expenses such as insurances | RM 300 | RM 400 |
| Total deductible expenses | RM 12,520 | RM 6,020 |
| --Break-- | --Break-- | --Break-- |
| Taxable rental income | Total annual rental income - deductible expenses; RM 25,000 - RM 12,520 = RM 12,480 | Total annual rental income - deductible expenses; RM 37,200 - RM 6,020 = RM 31,180 |
From the rental properties alone, the taxable income for the assessment year is RM 43,660.
If you have an employment income, the taxable rental income is added on top of your existing employment income. The tax bracket on your total taxable income is dependent on which threshold your annual income is in.
Final Words
Thank you so much for reading this article. I hope the information shared through my writing has been helpful in your journey in building your investment portfolio.
Until the next article, take care and stay safe.
