Tax implications of buying land in Nairobi

27 March 2021

Buying, selling and maintaining real estate comes at a cost, a portion of which is paid to the government via taxation. In Kenya, both the national and county governments are mandated to collect taxes from residents; value-added tax (VAT) and customs duty by the former and property tax by the latter.

If you own or plan to own land, it is important to understand your real estate tax obligation because it is the only way to avoid ending up with a massive backlog of unpaid taxes and penalties. It could also save you money because you will be aware of tax exemptions you qualify for.

With that in mind, what are the tax implications that apply to property in Nairobi? We explore below:

1. Land Rates

The Rating Act authorizes county governments to levy land rates at the municipality or township level. The county will also charge for services it offers, such as water, sanitation and sewerage. The value of the property is undertaken by county officials in order to determine the rates, on the authority of the Valuation for Rating Act. However, properties such as schools, places of worship and cemeteries are exempt from paying land rates.

2. Land Rent

Land rent is the tax paid to the lessor, most commonly the government or state authorities, before the end of the first month of the following year. It is paid annually, as per the stipulations of the Land Act. Land rent is only charged on a leasehold property, that is, land held for only a fixed amount of time.

3. Income Tax

If the property is used to generate an income, it will be required to submit income tax, according to the stipulations of the Income Tax Act. Rental income falls under this category. Rental income earned by residents is subject to a 10% income tax. However, some income-generating expenses are eligible for a tax break. Rental income earned by residents is also subject to a 3% withholding tax, which is deductible against one’s income tax liability. No tax is levied on capital gains earned from the sale of real property in Kenya.

4. Stamp Duty

Stamp duty is charged on instruments relating to land, for example, transfers, charges and leases. The actual amount charged for transfers may vary depending on the instruments, the user and time of payment. The Stamp Duty Act outlines the different exemptions to payment of this levy.