Rental property tax considerations for investors

If you’re a property owner in Malaysia renting out your space, navigating the complexities of rental property tax can be confusing.

In this article, we’ll help break down the key aspects of rental property tax in Malaysia. By understanding the claimable expenses available, you can effectively reduce your rental property income tax and keep more of your hard-earned income in your pocket.

What is rental property tax in Malaysia?

In Malaysia, rental income is taxable under the Income Tax Act 1967 and falls under two different categories:

Letting of property as a business source

Property rental is deemed a business source if the landlord actively provides maintenance and support services directly or indirectly through hiring a third party. These services can include:

• Maintenance and management of structural elements of the building, stairways, fire escapes, entrances and exits, lobbies, corridors, lifts/escalators, compounds, drains, water tanks, sewers, pipes, wires, cables, and other fixtures and fittings.
• Maintenance and management of the exterior parts of the property, such as playing fields, recreational areas, driveways, car parks, open spaces, landscaped areas, walls and fences, exterior lighting, or other external fixtures and fittings.

Letting of property as a non-business source

A property's rental is not considered a business source if the landlord does not actively and comprehensively provide maintenance or support services.

The rental property income tax is a progressive system that ranges from 0% to 30%. Fortunately, you can deduct certain expenses, allowing you to be taxed only on your net profit after expenses are accounted for.

So, what expenses are deductible, and do renovation costs qualify? Let’s look at the claimable expenses associated with rental income tax.

What rental property tax deductions can you claim?

As a landlord, one of your key responsibilities is maintaining your property and ensuring all related payments are made on time. These responsibilities are thus classified as necessary expenses that can be deducted from your rental income.

To maximise your property tax deductions, keeping thorough records of all associated invoices and receipts is crucial. Additionally, ensure you have a written tenancy agreement that is properly stamped and filed with LHDN.

1. Claimable expenses from renting property as a business source

Direct and indirect expenses for maintenance and support services.

2. Claimable expenses from renting property as a non-business source

Rental income that comes from a non-business source is typically residential units. Homeowners that fall under this category can claim the following as allowable expenses:

• Assessment tax and quit rent.
• Interest on home loan.
• Fire insurance premium.
• Quit rent.
• Expenses incurred on rent collection.
• Expenses on property maintenance and repairs.
• Expenses incurred on the renewal of the rent agreement.
• Expenses on repair to maintain the property in its existing state.
• Replacement cost of furnishings.
• Enforce rent collection fees (including legal expenses).
• Property service charges, maintenance fees, sinking fund, and Indah Water bills.

The following is not tax-deductible:

• Advertising cost to get the first tenant.
• Property agent fees/commission to obtain the first tenant.
• Legal cost and stamp duty for the first tenancy agreement.

Based on this, renovation costs are tax deductible if it is to:

• Repair or maintain the property in its existing state, such as repairing the roof, replacing broken tiles, or repainting.
• Replace the cost of furnishings damaged by tenants.

Renovation costs are not claimable as a tax-deductible expense if:

• The renovation enhances the value of the property compared to its original state.

Avoid penalties by properly declaring your rental income

Failure to file and disclose your rental income properly can result in significant penalties. The fines range from RM1,000 to RM10,000, plus up to 200% of the underpaid tax. To avoid these hefty penalties, ensure you declare your rental income and file it on time alongside your other income tax obligations.

Conclusion

As a property owner, you can optimise your rental property tax by keeping proper records of your property tax deductions and taking advantage of any tax incentives you qualify for. By staying informed and organised, you can reduce your tax burden and keep more of your rental earnings, all while staying compliant with tax regulations.

💡 The information provided above is purely for educational purposes.