Taxation of Rental Income and Capital Gains Tax on Property in Kenya
Real estate is one of the most profitable sectors in Kenya, attracting both individuals and corporates who invest in residential and commercial properties. However, owning property comes with tax obligations that every landlord, investor and property seller must understand. The two main taxes that apply to property owners in Kenya are Residential Rental Income Tax (also known as Monthly Rental Income – MRI) and Capital Gains Tax (CGT).
Both taxes are administered by the Kenya Revenue Authority (KRA) and are governed by the Income Tax Act. Yet, many people are still confused about how these taxes are charged, when they apply, and what exemptions exist. This blog explains in detail how MRI and CGT work, the applicable rates, filing procedures, and common misconceptions surrounding them.
Residential Rental Income Tax (Monthly Rental Income)
What is Residential Rental Income?
Residential rental income refers to payments received from tenants for the use or occupation of residential property. It applies only to landlords earning income from residential premises, whether individuals or companies. This tax regime was introduced on 1st January 2016 through the Finance Act 2015 to simplify tax compliance for landlords.
Who Qualifies for MRI?
The MRI system is mandatory for any resident landlord who earns gross rental income of between KSh 288,000 and KSh 15 million per year. This translates to between KSh 24,000 and KSh 1.25 million per month.
- If the rental income falls below KSh 288,000 per year, the landlord is not required to pay MRI but must declare the rental income under the normal annual income tax return.
- If the rental income exceeds KSh 15 million per year, MRI does not apply, and the landlord is taxed under the annual income tax regime together with income from other sources.
Tax Rate and Computation
Initially, MRI was charged at 10% of gross rent. However, the Finance Act 2023 reduced this rate to 7.5% effective from 1st January 2024. The tax is calculated on the gross rent received, meaning no expenses, losses, or capital allowances are deducted.
For example, a landlord receiving KSh 50,000 per month in rent will pay:
7.5% × 50,000 = KSh 3,750 per month.
It does not matter whether the landlord spent money on repairs, agent commissions, or maintenance – these costs cannot be deducted under MRI.
Filing and Payment of MRI
- Landlords must file a monthly return on iTax on or before the 20th day of the following month. For instance, rent received in March must be declared by 20th April.
- Even in months where no rent is received, the landlord must file a Nil return.
- MRI is paid electronically through KRA’s iTax portal, eCitizen, or mobile money channels.
Final Tax Nature of MRI
One key feature of MRI is that it is a final tax. This means that once you pay MRI on your gross rent, you do not need to declare that same income again in your annual income tax return. This greatly simplifies compliance for landlords.
Common Misconceptions About MRI
Many landlords misunderstand how MRI works. Here are clarifications:
- The size, location, or age of a property does not affect tax liability; only the amount of gross rent matters.
- Expenses such as maintenance, renovations, or insurance cannot be deducted under MRI.
- Non-residents are not eligible for MRI. Their rental income is subject to withholding tax instead.
- If you prefer to remain under the annual rental income regime, you may request the KRA Commissioner in writing for approval.
Capital Gains Tax (CGT) on Property
What is Capital Gains Tax?
Capital Gains Tax (CGT) is a tax charged on the profit (gain) realized when you sell or transfer property. It applies to land, buildings and even shares in companies where property value forms a significant part of the assets. In Kenya, CGT was re-introduced in 2015 after being suspended for nearly three decades.
Who Pays CGT?
CGT applies to both individuals and corporates who dispose of property situated in Kenya. It also applies to non-residents who sell property in Kenya. The responsibility to declare and pay CGT lies with the seller (transferor) of the property.
Applicable Rate
As of 1st January 2023, CGT is charged at 15% of the net gain from the sale of property. Prior to this, the rate was 5%, but the Finance Act 2022 revised it upwards to increase revenue collection.
How to Compute CGT
The taxable amount is the net gain, calculated as follows:
Net Gain = Transfer Value – (Adjusted Cost + Incidental Costs)
- Transfer Value: The amount received from the sale or transfer of property.
- Adjusted Cost: The acquisition price of the property plus any capital improvements (such as renovations or additions) and acquisition costs (such as legal fees, survey costs or stamp duty).
- Incidental Costs: Costs related to the sale, e.g. agent’s commission or legal fees during the transfer.
For example:
If you bought land in 2010 at KSh 2,000,000 and sold it in 2025 at KSh 6,000,000, while spending KSh 300,000 in improvements and KSh 200,000 in legal/transfer costs, your computation would be:
- Adjusted Cost = 2,000,000 + 300,000 = 2,300,000
- Net Gain = 6,000,000 – (2,300,000 + 200,000) = 3,500,000
- CGT = 15% × 3,500,000 = KSh 525,000
Filing and Payment of CGT
- CGT must be declared and paid within 30 days after the transfer of property is registered.
- Returns are filed on iTax, and payment is made electronically.
- Failure to pay on time attracts penalties and interest.
Exemptions and Reliefs from CGT
Certain transactions are exempt from CGT under the law, including:
- Transfers of property in cases of death (inheritance or administration of estates).
- Transfers between spouses or as part of divorce settlements.
- Transfers for purposes of internal corporate restructuring, subject to approval by KRA.
- The first sale of a private residential property by an individual, provided they have occupied it as their home for at least three years.
Recent Legal Changes on CGT
The Finance Act 2023 expanded the scope of CGT to cover not just direct property transfers but also indirect transfers. For example, if a foreign company that derives more than 20% of its value from property in Kenya is sold, CGT may still apply in Kenya. This was introduced to prevent avoidance of tax through offshore shareholding structures.
Why These Taxes Matter
Rental income tax and capital gains tax are key contributors to Kenya’s revenue base. For landlords, compliance with MRI ensures smooth operations and avoids penalties. For property sellers, CGT is unavoidable and must be factored into the cost of disposal. Understanding these taxes helps investors plan better, keep accurate records, and maximize their returns while staying compliant with the law.
Conclusion
The taxation of property in Kenya is clear once you understand the rules. Residential Rental Income Tax (MRI) is charged at 7.5% of gross rent for landlords earning between KSh 288,000 and KSh 15 million per year, while Capital Gains Tax (CGT) is charged at 15% of the net gain on the sale of property. Both taxes are filed online through iTax, with strict deadlines that must be observed.
Landlords and property investors are encouraged to maintain proper records, seek advice where necessary, and take advantage of available exemptions. By doing so, they not only remain compliant but also contribute to Kenya’s development agenda through tax revenue.
References
- Kenya Revenue Authority (KRA). Residential Rental Income. Available at: https://www.kra.go.ke/individual/filing-paying/types-of-taxes/residential-rental-income
- Kenya Revenue Authority (KRA). Capital Gains Tax. Available at: https://www.kra.go.ke/individual/filing-paying/types-of-taxes/capital-gains-tax
- Kenya Revenue Authority (KRA). FAQs on Residential Rental Income. Available at: https://kra.go.ke/helping-tax-payers/faqs/more-about-rental-income-tax
- Kenya Revenue Authority (KRA). FAQs on Capital Gains Tax. Available at: https://kra.go.ke/helping-tax-payers/faqs/capital-gain-taxes
- Finance Act, 2023 (Kenya) – Amendments to Rental Income Tax and Capital Gains Tax provisions.
