When the owner is holding on to the property, there are two additional taxes that the owner needs to pay; namely the property tax and income tax on the rental.
1. Property Tax
The subject matter in real estate is property. Property is possible to be purchased for investment but it can also be purchased for trading.
The property tax payable depends on the use and type of properties. The property tax payable is based on the annual value of the property. The Annual Value of a property is the estimated gross annual rent of the property if it were to be rented out , excluding furniture, furnishings and maintenance fees. It is determined based on estimated market rentals of similar or comparable properties and not on the actual rental income received.
For owner occupied residential property, property tax payable effective 1 January 2015 is:
For non-owner occupied residential property, the property tax payable is:
Non-residential properties such as commercial and industrial buildings and land are taxed at 10% of the Annual Value. The owner-occupier tax rates do not apply to non-residential properties even if you have bought the properties for your own use/ occupation.
2. Income Tax on Rental
If the property is rented out, the rental income derived from the property is taxable on the owner, just like the salary earned by an individual is taxable on the employee. The net rental income (gross rental less deductible expenses) is taxable on the owner when the rental income is due and payable to the property owner, and not the date of actual receipt.
To determine the net rental income, revenue expenses incurred solely for producing rental income and during the period of tenancy can be claimed as tax deduction. The common allowable expenses include interest on mortgage loan, property tax, fire insurance, repairs, maintenance, costs of securing subsequent tenants and utility.
Examples of non tax deductible expenses include repayment of principal loan, penalty imposed by bank for late repayment of loans, property tax incurred outside the rental period, insurance on personal, initial repair before the property was rented out, repair done which result in improvement/additions and alternation, the expenses incurred in getting the first tenant, depreciation of furnishing and expenses reimbursed by tenant.
To simplify the computation of rental income taxable on residential property, the owner may choose to claim rental expenses based on the mortgage interest payable and 15% of gross rental as deemed rental expenses. Of course, the owner can also opt to be taxed based on actual rental expenses incurred. In the case where the owner has more than one property, he must apply the same treatment to all his tenanted residential properties.
Computation of Net Rental Income for Residential Property
The Net Rental Income assessable is the lower of (A) or (B).
I hope this gives you more insight on how you can better advise your clients about their real estate and financial planning needs.