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How is rental taxed?

Repost of publication on The Sun Daily on 12 April 2021.
INDIVIDUALS need to file tax returns by April 30 with an extension given to e-filers until May 15, and any delays will trigger penalties ranging from 15% to 45%. It is common for individuals to have a portfolio of investments in real property that generate rental income as part of their retirement plans.

Rental income
Individuals who derive rental income from real property such as houses, apartments, shophouses, office spaces, factory buildings etc will be regarded as receiving passive income. In most cases, they will not be managing the rented property nor will they provide comprehensive maintenance and support services such as having staff or engaging third parties to do all things necessary to maintain the building on a continuous and active basis. They may carry out repairs or refurbishment when there are structural damages but will not provide day-to-day active maintenance of the property.

However, where individuals organise their operations where they provide comprehensive maintenance on a daily basis and perhaps provide cleaning, security and other support services, then such individuals can be regarded to be carrying on a business in letting properties.

There is a clear difference between earning passive rental income and business rental income. If the rental income is treated as business income, then you will be eligible to offset rental losses against other sources of income (interest, employment, other business income) in that tax year and any unutilised business losses can be carried forward to the next tax year. If an individual is treated to be carrying on a business, he can also claim capital allowances on plant and machinery such as lifts, air conditioners, water pumps, furniture and fittings, sprinklers etc. These benefits are not available to an individual earning passive rental income which will be the case for most individuals.

Advance rental and deposits
Deposits received are not taxable. However, deposits forfeited or withheld are taxable in the year it is forfeited/withheld. Rental received in advance is taxable in the year it is received and cannot be apportioned to the respective period it relates to.

Rental expenses
All direct expenses incurred in earning the rental income is deductible and they include assessment, quit rent, fire insurance premiums, expense on rent collection, expense on rent renewal, repairs to the structure of the property, fittings, and any equipment provided as part of the rental, utility bills borne by the landlord, and interest paid on loan taken out to finance the purchase of the property rented out.

If the property is temporarily vacant for a period for less than two years, expenses during that period is still deductible even though no income is earned.

Losses
Individuals who do not carry on a business of letting properties can offset the loss from any rented property against profits from another rented property in the same year. However, they cannot carry forward any unutilised losses.

Other matters
If an individual owns an industrial building and rents it to a business who uses it as an industrial building, the landlord can claim industrial the building allowance of 13% of the building cost in the first year and thereafter 3% in subsequent years.

From the period from April 2020 to June 2021, landlords that offer a minimum of 30% reduction in rental of properties used by small and medium enterprises (SMEs) in their business will be eligible to claim a special deduction equivalent to the amount of the reduction. This benefit was extended to non-SMEs from January 2021 to June 2021.
For more details, refer to the public ruling No. 12/2018 issued by the IRB.