Question

Hi, I’m John. I own 2 tenanted properties. The first property is an apartment and the second property is a terrace house. In 2021, I’d collected RM 14,400 and RM 6,000 in rental income from my apartment and terrace house respectively. I had spent RM 10,000 and RM 28,000 on these two properties in the year. Details for my expenditures on the two properties are as follows:

Side Note
I had rented out my apartment since 2017. Whereas for the terrace house, I had received its keys on 1 April 2021 and had it rented out on 1 July 2021. 


As my expenditures were higher than my rental income, could I use the losses to offset them against my business income? 


Answer: 

Here are 5 considerations that John needs to look into to answer this question: 


#1: Is John’s Rental Income a Source of Business Income?

According to PR12/2018, John could declare his rental income as a source of his business income if he offers comprehensive maintenance & support services on an active basis to his properties. These services would include cleaning, repairs, management of structural elements and exterior parts of his properties. But for John’s case, let’s assume that he is a passive investor, who is quite hands-free at most times on his properties. In his situation, John shall file in his rental income as a non-business source of income under paragraph 4(d) of the Income Tax Act (ITA) 1967. 


Consideration 1: Rental Income as Business Income or Non-Business Income? 


#2: When Did John First Rent Out His Property? 

In John’s case, where his rental income is a non-business income, the beginning date would be the date when his property is rented out to his tenant. Therefore for John, the rental income from his apartment shall be subject to income tax in 2021 for the entire year as it was first rented out in 2017. Meanwhile, as for the terrace house, the commencement date is set to be on 1 July 2021. This is quite important in calculating net rental income which is illustrated in our next point. 


Consideration 2: Commencement Date of Renting Out Properties.


#3: Allowable Expenses 

Based on PR12/2018, John could deduct a list of allowable expenses incurred in the course of renting his properties from his rental income to calculate the final figure of his net rental income. They are as follows: 


1. Interest Cost on Property Mortgages

From the table above, John revealed that he had paid RM 7,200 and RM 15,000 on his mortgage installments in 2021. The allowable expenses would be his cost of interest incurred on his mortgages. This excludes the principal portion on the mortgage installments. Let’s say the breakdown of these mortgage installments are as follows: 

For his apartment, the allowable expense would be RM 4,000. 

But for his terrace house, the commencement date is on 1 July 2021. Hence, his allowable expense shall be the interest portion of mortgage installment paid on this property from 1 July 2021 to 31 December 2021. This would work out to be an estimated figure of RM 6,000 (RM 9,000 x 6 months / 9 months). 

His allowable expense is RM 4,000 for Property 1 and RM 6,000 for Property 2. 


2. Service Charge and Sinking Fund

They are allowable expenses that can be deducted from his rental income. So in John’s case, his allowable expense is RM 1,200 for Property 1. 


3. Quit Rent and Assessment 

They are also deductible. So, John’s allowable expense is RM 120 for Property 1 and RM 150 for Property 2. 


4. Fire Insurance Premiums

They are deductible. So, John’s allowable expense is RM 80 for Property 1 and a total of RM 150 for Property 2. 


5. Repair and Maintenance

This is deductible. So, John’s allowable expense is RM 200 for Property 1. 


6. Installation of 1 Air-Conditioner 

This relates to an installation of an air-conditioning unit at Property 2. If his unit is a brand new addition and not a replacement of a spoilt unit, then, the cost to this air-conditioning unit is not an allowable expense and thus, not deductible. 


7. Agent’s Commission to Secure Tenant

If the agent’s commission paid is to renew tenancy or change a new tenant, this cost is an allowable expense and is deductible. The commission is not an allowable expense if it is to secure its first tenant. So, John’s allowable expense is RM 1,200 for Property 1. The RM 1,500 paid will not be qualified for tax deduction. 

8. Minor Renovation

This relates to minor works on John’s terrace house before renting out. As such, this cost is not an allowable expense. 


All in all, John’s allowable expenses for both properties are listed as follows: 

With that, let’s move onto: 


#4: Calculating Net Rental Income 

According to PR12/2018, John can group the two properties together, make the calculation of his net rental income and declare his final figure at his tax file. So, in John’s case, the final figure is tabulated as follows: 


Therefore, the final figure of John’s net rental income is RM 7,300 in 2021. 


#5: Tax Rate Applicable 

Let’s say John is a tax resident in Malaysia. The RM 7,300 in net rental income is subject to a tiered-rate, depending on his final statutory income. So, if John had made RM 150,000 in statutory income, inclusive of his net rental income, in the case for John, his net rental income is subject to a tax rate of 24%, which in turn would work out to be an income tax payment of RM 1,752 in 2021. 


Conclusion: 

There you go, the 5 key considerations needed to do tax filing or planning when it comes to your rental income. Once again, they are as follows: 


1. Identify if Your Rental Income is a Business or Non-Business Income. 
2. Take note of the Commencement Date for Renting Your Properties. 
3. Deduct All Allowable Expenses from your Gross Rental Income. 
4. Group All Rental Income under 1 Single Source of Income. 
5. Use the Tax Rate Applicable to Calculate Your Final Income Tax Payment. 


That’s it for now. 

If you have any questions, please feel free to post them at the box below:


Ian Tai
Ian Tai

Financial Content Machine. Dividend Investor. Produced 500+ Financial Articles featured in KCLau.com in Malaysia and the Fifth Person, Value Invest Asia, and Small Cap Asia in Singapore. Regular Host and Presenter of a Weekly Financial Webinar with KCLau.com. Co-Founded DividendVault.com, an online membership site that empowers retail investors to build a stock portfolio that pays rising dividends year after year in Malaysia and Singapore.

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