Real estate taxes you must pay

Recently, George Kidega, the Gulu City finance manager, urged government to conduct continuous sensitisation about property rates echoing voices of many stakeholders, who have often noted that the public is unaware of property taxes. 

Rental income tax for individuals

According According to the Uganda Revenue Authority rental income guide, rental income tax is the tax collected from the total amount of rent derived by a person for the year of income from the lease of immovable property. 

In this case the immovable property subject to the tax could be land or buildings after the deduction of any expenditure incurred in respect of the property. 

URA spokesperson, Ibrahim Bbossa, says it is important for those who earn rental income to know how to calculate their rental income tax. 

“The tax rate for rental income is 12 percent, and the property owner is allowed to deduct a threshold of Shs2,820,000 for costs before the tax is calculated,” he says.

To calculate rental income tax, there are specific steps to follow such as determining the total annual gross rent earned from all sources. Then deduct the annual threshold of Shs2,820,000 from the total gross rent and the calculate the rental tax at 12 percent on the chargeable rental income.

Bbossa illustrates: “If your gross rental income is Shs40,000,000, rental income tax can be calculated as Shs40,000,000 minus Shs2,820,000  to get the chargeable rental income Shs37,180,000. In this case where rental tax is at 12 percent, Shs37,180,000 will account for Shs4,461,600. Based on this example, the rental tax payable for the year amounts to Shs4,461,600.”

Bbosa highlights that the only property owners liable to the annual income tax are those who earn more than Shs2.82m from their properties.  They also qualify for a reduced income tax rate of 12 percent. He adds that this lower rate is intended to cover costs such as operation, administrative and financial expenses.

On the other hand, real estate companies, trustees and retirement funds can claim up to 50 percent of costs.  It should be noted that deductions are considered where expenditures and losses incurred in the production of rent, shall be allowed as a deduction for any year of income. 

Expenses include cost of repairs, property manager fees, cost of advertising and marketing the property, utility bills and bad debts, among others as verified by URA.

Land transactions

Normally, the only tax paid on land transactions is stamp duty on the value of the land upon being transferred. Stamp duty payable for each agreement or memorandum of agreement is Shs15,000. This tax is paid by the buyer of land or any property. 

However, other taxes such as income tax and value-added tax may arise in isolated cases say if your land is held as a business asset. 

According to officials at URA, if land sold is held as a business asset, the income earned from the sale is subject to income tax which is charged on the income of an individual granted by the Income Tax Act. 

In addition, where one sells improved land or commercial premises with a value above the VAT threshold of Shs150M, the transaction will attract value-added tax of 18 percent. 

It should be noted that on December, 6 2021, URA made it a requirement for buyers and sellers of land valued at Shs10m and above to have Taxpayer Identification Numbers (TINs).

In cases where the land transaction involves a company, it is mandatory to have a TIN even if the amount is below Shs10m. For land and other property transactions, one might have to pay withholding tax, a form of income tax that is withheld by a person making payment to another person. In this case the one who makes the payment deducts the tax from the amount being paid which is transferred to URA.

“A person who is buying a business asset, say land needs to withhold the tax from the amount they are paying to the seller and remit it to the URA,” Ashraf Ssendegeya, a land dealer explains.

 Withholding tax is usually calculated at the rate of six percent of the gross payment withheld at the point of making the transaction.

Property tax

Legally, properties are subject to taxes as guided by the Local Government Act 2005 as amended, the Local Government (Rating) regulation 2006 and KCC Act 2010. The taxes paid are usually dependent on the levies of the local government of the area. 

This tax is levied on the value of a particular commercial property, regardless of whether the owner earns rental income from that property or not. Property rate tax is different from rental income tax that is remitted to URA.  

Property tax is paid to the local government, for example, city authorities, town councils, divisions or municipalities. This tax applies to any property or building commercially ran, such as houses rented to tenants, shops, factories or any part of a property used for business, even if it is owner-occupied.

It does not apply to the residential home that you live in. The amount levied annually on a property is usually between zero and 12 percent of the value, with a minimum charge of Shs2,000 while KCCA’s six percent.

According to the Local Government Act, local governments can charge a percentage not exceeding 12 percent of the taxable value of the property and a minimum of Shs2,000. The taxable value is 74 percent of the revenue generated by a property.

Governing law

Local Government (Rating) Act 2005 as amended, the Local Government (Rating) regulation 2006 and KCC Act 2010. Under the Local Government (Rating) Act, 2005, Property rate is levied on property or hereditament, that is, ‘any physical attachment to land or building (industrial or non-industrial) or structure of any kind excluding vacant sites.

Property tax is therefore, levied on all immovable property or buildings, commercially ran such as  schools, rented houses, shops, factories, hotels, private and public universities and any part of which is used for the purpose of business even if it is owner occupied.

Property rates should be distinguished from ground rent. Unlike property rates, ground rent is a charge on land leased out by the authority whether developed or not.

Who is exempted from paying property tax ?

Under the Local Government Act 2005 and its amendments of 2006, property rates tax is exempted from the following;

1.  Any official residence of the President

2. Any official residence of a traditional or cultural leader.

3. Any property used exclusively for public worship, and as a residence of a religious leader.

4. Any property used exclusively as a cemetery or as a crematorium.

5. Any property used exclusively for the purposes of any charitable or educational institution of a public character

6. Supported only by endowments or voluntary contributions.

7.  Any property laid out and used exclusively for the purpose of outdoor sport or recreation.

8. Any property belonging to a mission/organization entitled to privileges under the diplomatic privileges Act.

9. Any property belonging to an organization in respect of which Uganda is obliged under any international convention or treaty.

10. Any property belonging to any institution with which government has contractual obligation not to levy fees and tax against it.

11. Any property that earns less than Shs2,820,000 in annual income.