Property owners and investors should consider some of the subtleties of managing rental properties and inheriting assets, says Chee Pei Pei, executive director of Deloitte Malaysia.
Most property owners are familiar with the Real Property Gains Tax (RPGT), or the levying of taxes on the profits from the sale of a property. The rate gradually decreases for each year the owner holds it and decreases to at least 5% from the sixth year and beyond. Such a tax is usually intended to prevent speculation in the property market, which leads to prices rising in a short period of time.
According to Chee, property owners need to consider the difference in RPGT treatment that exists between transferring a property in their lifetime and bequeathing it to their next of kin. “I would advise caution if the beneficiary had to sell the property they received. The first transaction – that of property transferred from parent to beneficiary during lifetime – does not attract RPGT. However, the beneficiary who sells the property a few years later will do so [have to pay the RPGT].
“In this case, the RPGT is calculated based on the price of the property when it was purchased by the parent all those years ago, rather than the value of the property when it was transferred to the beneficiary.”
She spoke at the Rockwills Estate Planning Conference in Malaysia on August 18.
For example, suppose a parent bought a property worth 200,000 RM in 1999. That year he gave the property to his child. When the parent died in 2014, the property was worth RM 1 million. Then, in 2019, the child decided to sell the property for RM 2 million.
In this scenario, the child would have a significant RPGT burden as the tax would be calculated based on the initial purchase price of the property of RM 200,000 instead of RM 1 million. This means that he would be subject to an RPGT of 5% on the RM 1.8 million or RM 90,000 won.
Hence, Chee advises parents to leave traits in their wills. If the beneficiary decides to sell the property in the future, the RPGT calculation will apply to the value of the property at the time of the parent’s death.
In this scenario, if the parent died in 2015 when the property was worth RM 1 million and the beneficiary sold it for RM 2 million in 2019, they would rate an RPGT of 5% on the RM 1 million or 50,000 gained RM subject.
“One reason for this particular difference is because people who owe money or have creditors are discouraged from simply transferring their property out of their name, thereby denying their creditors repayment,” Chee told Personal Wealth.
When it comes to rental income, property owners need to be careful not to rent out as a landlord. Rents, which count as business taxable income, usually entail more tax benefits and deductions than renting out real estate as a private individual.
“If you can show that you rent real estate, all rental expenses are usually tax-deductible,” says Chee.
Items like refrigerators, microwave ovens, cupboards, beds, and even cooking utensils could likely be claimed in the form of capital relief, which would reduce taxable rental income.
However, real estate owners must meet a list of requirements before rental income can be considered business income, says Chee. “The tax authorities want to make sure that you regularly maintain and manage the property. There must be full and active provision for a range of activities before being considered a real estate landlord.
“For example, the owner should keep the entrances, stairs and lobbies clean and tidy at all times. Likewise, all other open spaces – such as parking lots, driveways and recreational areas – should be well managed. It’s not enough for you to just hire a few security guards and say you are in the business of renting out real estate. “