Even though the deadline for filing one’s taxes has passed – with the exception of individuals who run a business, where the due date for Form B submission is June 30, or if you’re a tax evader – here’s a hypothetical taxation-related scenario.
Assume John owns two rental properties, the first an apartment and the second a terrace house. In 2021, he collected RM14,400 and RM6,000 in rental income from the apartment and house, respectively, and spent RM10,000 and RM28,000 on these properties in the year.
The details of his expenditure are as follows:
John has been renting out his apartment since 2017, whereas for the terrace house, he received the keys on April 1 last year and has been renting it out since July 1.
As his expenditure was higher than his rental income, could John offset his losses against his statutory income? Here are five things he needs to look into to answer this question.
1. Determine business or non-business income
John can declare his rental income as a source of business income if he offers consistent and comprehensive maintenance of his properties. These would include cleaning and repairs, as well as management of structural elements and the exteriors.
But if John is a passive landlord who is largely hands-off, he would have to file his rental income as a non-business source of income.
2. Know your start date
The start date is the official date that a property is rented out as per the tenancy agreement.
For John’s apartment, rental income is taxed for the entire year as it has been rented out since 2017. For the terrace house, the commencement date was July 1, 2021.
3. Deduct allowable expenses
To calculate his net rental income, John can deduct a list of allowable expenses incurred in the course of renting out his properties. As per the chart above, they are as follows:
• Interest on property mortgages
John paid RM7,200 and RM15,000 on his mortgage last year. Excluding principal amounts, the interest incurred is an allowable expense. Hence, the breakdown for his mortgage instalments is as follows:
For his apartment, the allowable expense amounts to RM4,000. But for his terrace house, only the interest on instalments paid from July 1 to Dec 31 is factored in, which works out to be an estimated figure of RM6,000 (RM9,000 x 6 months / 9 months).
Therefore, his allowable expense is RM4,000 for Property 1 and RM6,000 for Property 2.
• Service charge and sinking fund – RM1,200 for Property 1.
• Quit rent and assessment – RM120 for Property 1 and RM150 for Property 2.
• Fire insurance premiums – RM80 for Property 1 and RM150 for Property 2.
• Repair and maintenance – RM200 for Property 1 only.
• Air-conditioner installation – This relates to installation of an air-conditioning unit in Property 2. If this aircon unit is a brand-new addition and not the replacement of a damaged unit, it is not an allowable expense.
• Agent’s commission to secure a tenant – If the agent’s commission was to renew tenancy or to find a replacement tenant, it is an allowable expense. But if the commission was to secure the property’s very first tenant, it is not deductible. Hence, John’s allowable expense here is RM1,200 for Property 1 only. The RM1,500 paid for Property 2 does not qualify.
• Minor renovation – As this relates to minor works on John’s terrace house before renting it out, it is not an allowable expense.
All in all, John’s allowable expenses for both properties are as follows:
4. Calculate net rental income
John can group the two properties together to calculate his net rental income. The final figure is tabulated as follows:
Therefore, John’s net rental income is RM7,300 for 2021.
5. Apply the appropriate tax rate
Assuming John is a tax resident in Malaysia, this RM7,300 in net rental income is subject to a tiered rate depending on his final statutory income.
If he made RM150,000 in statutory income last year, inclusive of his net rental income, the net rental income alone is subject to a tax rate of 24%.
This works out to John having to pay RM1,752 for his net rental income in 2021.
This article first appeared in KCLau.com. Ian Tai is a financial content writer, dividend investor, and author of many articles on finance featured on KCLau.com in Malaysia, and ‘Fifth Person’, ‘Value Invest Asia’ and ‘Small Cap Asia’ in Singapore.