Capital Gains Tax on Real Estate in Kenya
- Muhoro & Gitonga Associates
- Feb 6, 2024
- 5 min read
Updated: Oct 17, 2024
Capital Gains Tax (CGT) on real estate in Kenya is an important consideration for property investors and homeowners. With the real estate market growing rapidly, understanding the implications of CGT is crucial for making informed financial decisions.
This guide provides a detailed overview of Capital Gains Tax on real estate in Kenya, including its legal framework, calculation methods, and practical examples to help you navigate this complex topic effectively.
The Rationale Behind Capital Gains Tax
Capital Gains Tax is levied on the profit earned from the sale of property or assets. For real estate, this means paying tax on the difference between the purchase price and the sale price of a property.
In Kenya, CGT is a significant revenue source for the government and plays a role in regulating the real estate market. It ensures that profits from property sales are taxed, contributing to equitable economic growth and infrastructure development.
Legal Framework
CGT in Kenya is governed by the Income Tax Act and was reintroduced in 2015 after being suspended for nearly three decades. The tax is administered by the Kenya Revenue Authority (KRA).
The Finance Act of 2022 increased the CGT rate from 5% to 15%, effective January 2023
Capital Gains Tax on Transfer of Property
What constitutes a transfer?
If property is sold, exchanged, conveyed or otherwise disposed of in any manner (including by way of gift), whether or not for consideration;
On the occasion of the loss, destruction or extinction of property whether or not a sum by way of compensation is received in respect of the loss, destruction or extinction unless that sum is utilized to reinstate the property in essentially the same form and in the same place within one year or within a longer period of the time approved by the Commissioner.
On the abandonment, surrender, cancellation or forfeiture of, or the expiration of substantially all rights to property, including the surrender of shares or debentures on the dissolution of a company
Exceptions to Capital Gains Tax on Property in Kenya
Capital Gains Tax (CGT) in Kenya is levied on the profit made from the sale of property. However, there are several exceptions and exemptions to this tax, which can significantly impact property transactions.
Understanding these exceptions is crucial for property owners and investors to ensure compliance and optimize their tax liabilities.
1. Transfer of Property for Securing a Debt
When property is transferred solely for the purpose of securing a debt or loan, such transactions are exempt from CGT. This includes situations where property is used as collateral and later returned to the owner upon repayment of the debt.
2. Transfer of Property Between Spouses
Property transfers between spouses are exempt from CGT. This exemption also applies in the case of divorce settlements, where property is transferred as part of the settlement agreement.
3. Transfer of Property to Immediate Family Members
Transfers of property to immediate family members, such as children or parents, are exempt from CGT. This helps in facilitating family arrangements without incurring additional tax burdens.
4. Transfer of Property for Charitable Purposes
Property transferred for charitable purposes, such as donations to registered charities or non-profit organizations, is exempt from CGT. This encourages philanthropic activities and supports charitable organizations.
5. Sale of a Primary Residence
The sale of a primary residence is exempt from CGT, provided the owner has lived in the property continuously for at least three years immediately preceding the sale. This exemption is designed to protect homeowners from tax liabilities on their primary living space.
6. Agricultural Property
Agricultural property is exempt from CGT if it meets certain criteria:
The property must be less than 100 acres in size and located outside a municipality or urban area.
If within a municipality or urban area, the property must be less than 50 acres.
7. Property Transfers Below a Certain Value
Transactions with a transfer value of not more than KES 3 million are exempt from CGT. This exemption is particularly beneficial for small property owners and low-value transactions.
8. Corporate Restructuring
In cases where the Cabinet Secretary deems a corporate restructuring to be in the public interest, property transfers involved in such restructuring may be exempt from CGT. This exemption facilitates business reorganizations and mergers.
Allowable Expenses for the Purposes of CGT
Cost of acquisition/construction
Loan/mortgage interest
Cost of advertising to find a buyer
Costs incurred in valuation of the property
Legal fees
Costs of enhancements.
How to Calculate Capital Gains Tax
Calculating CGT involves determining the net gain from the sale of a property and applying the relevant tax rate. Here’s a step-by-step guide:
Step 1: Determine the Purchase Price
The purchase price is the amount paid to acquire the property, including all associated costs such as legal fees, stamp duty, and registration fees.
Example: If you purchased a property for Kshs 5,000,000, and paid Kshs 200,000 in legal and registration fees, the total purchase price is Kshs 5,200,000.
Step 2: Determine the Sale Price
The sale price is the amount received from selling the property.
Example: If you sold the property for Kshs 8,000,000, the sale price is Kshs 8,000,000.
Step 3: Calculate the Net Gain
CGT is calculated as 15% of the net gain from the sale of property. The net gain is determined by subtracting the acquisition and incidental costs from the transfer value.
Formula: [ {Net Gain} = {Transfer Value} - {Acquisition Cost} + {Incidental Costs} {CGT} = 15% of Net Gain}
Example Calculation:
Transfer Value: KES 10,000,000
Acquisition Cost: KES 6,000,000
Incidental Costs: KES 500,000
{Net Gain} = 10,000,000 - (6,000,000 + 500,000) = 3,500,000] [{CGT} = 15% of 3,500,000 = 525,000
In this example, the CGT payable would be KES 525,000.
How do I pay for Capital Gains Tax?
The due date for CGT payment shall be the earlier of receipt of full purchase price by the vendor or the registration of the transfer instrument in favor of the transferee.
Payment should be initiated online via iTax https://itax.kra.go.ke
The modes of payment include cash, cheque or RTGS.
After initiating payment, you will receive a payment slip.
Present the payment slip at any KRA appointed bank with the due tax to complete payment.
Summary of Capital Gains Tax Impact
Impact on Real Estate Transactions
Capital Gains Tax affects both buyers and sellers in real estate transactions. For sellers, understanding CGT helps in financial planning and setting realistic sale prices. For buyers, it influences the overall cost of acquiring property, including future potential tax liabilities.
Impact on Property Investment
Investors should consider CGT when evaluating the profitability of real estate investments. High CGT can reduce the net return on investment, making it essential to factor this tax into investment decisions.
Impact on Property Prices
The imposition of CGT can impact property prices by influencing seller behavior. Sellers might adjust their asking prices to account for the tax, potentially affecting market dynamics.
Conclusion
Capital Gains Tax on Real Estate in Kenya is a critical consideration for property investors and homeowners. By understanding the legal framework, calculation methods, and practical implications of CGT, you can make informed decisions that optimize your financial outcomes.
The 15% tax on net gains from real estate sales ensures that profits are fairly taxed, contributing to national revenue and economic development.
For further assistance with Capital Gains Tax and other real estate matters, contact our law firm today. Our expert legal team can provide personalized advice and support to help you navigate the complexities of real estate taxation and compliance.
