Allowable Expenses for Rental Income: What You Can Deduct

Learn which expenses you can deduct from your rental income to reduce your tax liability.

In Simple Terms

Allowable expenses are costs you incur in earning rental income that you can deduct from your rental income before calculating tax. This reduces your taxable rental income and therefore your tax liability. However, not all expenses are deductible - only those that are directly related to earning the rental income.

Overview

When calculating your rental income tax, you can deduct certain expenses that are incurred in earning that rental income. Understanding what's deductible can significantly reduce your tax burden.

Key Principle

An expense is deductible if it is incurred wholly and exclusively in earning rental income. Personal expenses or expenses that benefit you personally (not just the rental property) are generally not deductible.

What Are Allowable Expenses?

Allowable expenses must meet these criteria:

Criteria for Deductibility

  • Wholly and exclusively: The expense must be incurred solely for earning rental income
  • Revenue nature: The expense must be revenue (not capital) in nature
  • Reasonable: The amount must be reasonable and not excessive
  • Documented: You must have receipts and documentation
  • Incurred in the tax year: Expenses must relate to the income year

Deductible Expenses

The following expenses are generally deductible from rental income:

Property Maintenance and Repairs

  • Repairs to maintain the property in its current condition
  • Painting and decorating
  • Plumbing repairs
  • Electrical repairs
  • Roof repairs
  • Fence repairs
  • General maintenance costs

Property Management

  • Property management fees
  • Agent commissions
  • Legal fees for rent collection
  • Accountancy fees for rental income

Insurance and Utilities

  • Building insurance
  • Landlord insurance
  • Water bills (if paid by landlord)
  • Garbage collection fees

Finance Costs

  • Mortgage interest (not principal repayment)
  • Loan interest for property purchase/improvement
  • Bank charges on rental income account

Rates and Levies

  • Local authority rates
  • Service charges
  • Security charges
  • Garbage collection fees

Other Allowable Expenses

  • Advertising for tenants
  • Travel expenses to inspect property (reasonable amounts)
  • Cleaning costs between tenants
  • Garden maintenance
  • Security services

Non-Deductible Expenses

The following expenses are NOT deductible:

Capital Expenditure

  • Purchase price of the property
  • Major renovations that improve the property (capital improvements)
  • Extensions or additions to the property
  • Initial repairs before first rental
  • Furniture and appliances (unless specifically for rental)

Personal Expenses

  • Personal use of the property
  • Personal travel not related to property management
  • Personal phone calls
  • Entertainment expenses
  • Personal insurance

Other Non-Deductible Items

  • Principal repayment on mortgage (only interest is deductible)
  • Penalties and fines
  • Personal legal expenses
  • Expenses not related to rental income
  • Expenses for periods when property was not rented

Important Distinction: Repairs vs. Improvements

Repairs (deductible): Work to restore the property to its original condition

Improvements (not deductible): Work that enhances the property beyond its original condition

Example: Fixing a broken window = repair (deductible)

Example: Replacing all windows with double-glazed windows = improvement (not deductible)

How to Calculate Net Rental Income

Worked Example

Scenario: You own a rental property that generates KES 240,000 per year in rent.

Step 1: Calculate Gross Rental Income

Annual rent: KES 240,000

Step 2: Calculate Total Allowable Expenses

  • Property management fees: KES 24,000
  • Repairs and maintenance: KES 30,000
  • Insurance: KES 12,000
  • Rates and levies: KES 18,000
  • Mortgage interest: KES 60,000
  • Other expenses: KES 6,000
  • Total: KES 150,000

Step 3: Calculate Net Rental Income

KES 240,000 - KES 150,000 = KES 90,000

Step 4: Calculate Tax (assuming 30% rate)

Tax: KES 90,000 × 30% = KES 27,000

Note: Without deductions, tax would be KES 72,000 (30% of KES 240,000). Deductions saved you KES 45,000 in tax!

Documentation Requirements

To claim expenses, you must maintain proper records:

Required Documentation

  • Receipts and invoices for all expenses
  • Bank statements showing payments
  • Contracts for services (management, repairs, etc.)
  • Insurance policies and premium receipts
  • Mortgage statements showing interest paid
  • Rates receipts from local authorities
  • Travel records if claiming travel expenses

Record Keeping Period

Keep all records for at least 5 years after the end of the tax year. KRA may request these documents during an audit.

Common Questions

Can I deduct expenses for a property that's not currently rented?

Generally, no. Expenses are only deductible for periods when the property is available for rent or actually rented. However, you may be able to deduct expenses if the property is being actively marketed for rent.

What if I use the property for both personal and rental purposes?

You can only deduct expenses in proportion to the rental use. For example, if you use the property 70% for rental and 30% personally, you can only deduct 70% of the expenses.

Can I deduct the cost of furniture and appliances?

Generally, no. Furniture and appliances are considered capital assets. However, if you provide them as part of the rental (furnished rental), you may be able to claim depreciation or wear and tear allowance. Consult a tax professional for guidance.

What about expenses I paid in cash?

You can still claim cash expenses, but you must have receipts or other documentation. KRA may scrutinize cash expenses more closely, so ensure you have proper documentation.