Malaysia Rental Income Tax Guide

Rental Income — Taxed at Progressive IIT Rates (0% to 30%)

• Rental income as the part of the total income: The rental income (the "pendapatan sewa" — the "rental income") is included in the individual's total chargeable income and taxed at the progressive rates of 0% to 30%. The rental income is NOT subject to the separate tax regime — it is added to the other income (the "employment income", the "business income", the "dividend income") and taxed at the marginal rates. The first MYR 5,000 of the chargeable income is taxed at 0%, and the rates increase progressively up to 30% for the income above MYR 2,000,000.
• Reporting in Form BE: The rental income is reported in the "Form BE" (the "Borang BE" — the "resident individual tax return") under the "other income" section (the "pendapatan lain" — the "other income"). The taxpayer must report the gross rental income and the allowable expenses (the "perbelanjaan yang dibenarkan" — the "allowable expenses"). The net rental income (the "pendapatan sewa bersih" — the "net rental income") is included in the total chargeable income.
• Rental deposit — NOT taxable: The rental deposit (the "deposit sewa" — the "security deposit") is NOT taxable as the income. The deposit is held as the security and must be returned to the tenant at the end of the tenancy (less the agreed deductions). However, the forfeited deposit (the "deposit that is not returned to the tenant") is taxable as the income in the year of the forfeiture.

50% Deemed Expense Deduction — Automatic Election

• Automatic 50% deduction: The taxpayer may claim the "deemed expense deduction" of 50% of the gross rental income WITHOUT the need to substantiate the actual expenses. The 50% deduction is automatic — the taxpayer simply reports 50% of the gross rental income as the "net rental income" in the tax return. The deemed deduction covers ALL the rental expenses — the maintenance, the repairs, the insurance, the property management fees, the quit rent, and the assessment tax.
• No record-keeping required: The deemed deduction eliminates the need for the detailed record-keeping of the rental expenses. The taxpayer does NOT need to retain the receipts or the invoices for the rental expenses. The LHDN accepts the deemed deduction without the supporting documents. The deemed deduction is the SIMPLER option for the individual landlords with the limited rental activities.
• When deemed deduction is disadvantageous: The deemed deduction may be less favourable than the actual expenses if the total actual expenses exceed 50% of the gross rental income. For example, if the rental income is MYR 12,000 per year and the actual expenses are MYR 8,000 (66% of the income), the deemed deduction of 50% (MYR 6,000) results in the higher taxable income than the actual expenses (MYR 12,000 - MYR 8,000 = MYR 4,000 net). The taxpayer should compare the deemed deduction against the actual expenses each year.

Actual Cost Election — Deductible Expenses

• Actual costs — the alternative to deemed deduction: The taxpayer may elect to claim the ACTUAL rental expenses instead of the 50% deemed deduction. The election is made in the annual tax return. Once the election is made, the taxpayer must claim the actual expenses consistently — the taxpayer cannot switch between the deemed deduction and the actual expenses arbitrarily from year to year. The LHDN requires the election to be made in the "Borang BE" by stating the actual expenses claimed.
• Allowable actual expenses: The deductible expenses include: (a) the quit rent (the "cukai tanah" — the "land tax"); (b) the assessment tax (the "cukai pintu" — the "property assessment tax"); (c) the fire insurance premium; (d) the mortgage interest (the "interest on the housing loan" — the "interest expense on the loan used to purchase the rental property"); (e) the repairs and the maintenance (the "kos penyelenggaraan" — the "maintenance cost"); (f) the property management fees (the "yuran pengurusan"); (g) the agent's commission for finding the tenant; (h) the legal fees for the tenancy agreement; (i) the depreciation on the furniture and the fittings (the "capital allowances" — the "elaun modal").
• Non-allowable expenses: The following expenses are NOT deductible: (a) the capital expenditure — the cost of the extension or the renovation of the property (the "perbelanjaan modal" — the "capital expenditure" is claimed as the capital allowance instead); (b) the principal repayment of the mortgage loan (the "bayaran pokok" — the "principal payment" is a capital repayment, NOT an expense); (c) the personal expenses — the utility bills if paid separately by the landlord (unless included in the rental agreement); (d) the depreciation of the building itself (the "bangunan" — the "building depreciation" is NOT deductible).

RPGT — Real Property Gains Tax on Disposal

• RPGT rates — 0% to 30%: The Real Property Gains Tax (the "Cukai Keuntungan Harta Tanah" — the "CKHT") is imposed on the chargeable gain from the disposal of the real property. The RPGT rates depend on the holding period and the citizenship: (a) the Malaysian citizen — 0% on the disposal after 5+ years (the "no RPGT after 5 years"); (b) the Malaysian citizen — 30% on the disposal within 2 years, 20% within 3 years, 15% within 4 years, 5% within 5 years; (c) the non-citizen — 30% on the disposal within 5 years, 10% on the disposal after 5 years; (d) the company — 24% on the disposal within 5 years, 10% after 5 years. RPGT applies to the property used for the rental.
• Chargeable gain calculation: The chargeable gain = the disposal price − the acquisition price − the allowable expenses. The allowable expenses include: (a) the legal fees for the acquisition and the disposal; (b) the stamp duty on the acquisition and the disposal; (c) the renovation expenses (the "capital expenditure on the improvement"); (d) the agent's commission on the disposal. An individual is entitled to the exemption of MYR 200,000 or 10% of the chargeable gain (whichever is higher) for each disposal.
• Exemption for the principal residence: The gain from the disposal of the PRINCIPAL RESIDENCE (the "rumah kediaman utama" — the "owner-occupied home") is EXEMPT from the RPGT, provided the property was not used for the rental or the business purposes. The exemption is available ONCE per lifetime for the individual. The property that has been used for the rental at any time is NOT eligible for the principal residence exemption.

FAQs

Is the rental income subject to the SST?

No. The rental income from the residential property is NOT subject to the Sales and Services Tax (SST). However, the rental of the COMMERCIAL property (the "rental of the commercial space" — the "office, the retail, the factory") may be subject to the service tax of 6% if the annual rental turnover exceeds the SST registration threshold of MYR 500,000.

Can the rental loss be offset against the employment income?

No. The rental loss (the "kerugian sewa" — the "rental business loss") can ONLY be offset against the rental income from the other properties. The rental loss CANNOT be offset against the employment income or the other non-rental income. The unabsorbed rental loss may be carried forward to the future years to offset against the future rental income.

What is the LHDN's position on the short-term rental (Airbnb)?

The LHDN treats the short-term rental income (the "Airbnb" or the "homestay" income) as the rental income if the property is rented out on the occasional basis. However, if the short-term rental activity is conducted with the high frequency and the active management (the "daily cleaning, the guest communication, the dynamic pricing"), the LHDN may reclassify the income as the BUSINESS income, which is subject to the same progressive rates but allows the wider range of the deductions.