When a landlord spends money on a rental, the tax treatment depends on what the money bought. Replacing a broken tap is a repair and reduces the profit on which you are taxed. Adding a new floor is an improvement, which is a capital cost and is treated differently. Getting it wrong either loses you a legitimate deduction or leads to a claim that KRA later disallows. This guide explains the dividing line.

First, which tax route are you on?

The question only matters if you are taxed on your profit, as an annual-tax landlord. Landlords who pay Monthly Rental Income tax at 7.5% of gross rent cannot deduct any expense, so for them the line between repair and improvement does not change the tax, although it affects the property's cost for a later sale. Compare the two routes with the MRI vs annual tax comparison and read MRI or annual rental tax.

What counts as a repair

A repair restores something to its earlier condition without changing its character or extending its life much. Typical examples:

  • Repainting walls, fixing a leaking roof or replacing broken tiles
  • Repairing plumbing, wiring, locks and gates
  • Replacing a worn-out appliance with a similar one
  • Pest control, cleaning between tenants and servicing a pump

These costs are deductible in the year you incur them, provided they are for the rented property and you have receipts. See deductible expenses for landlords for the wider list including land rates, insurance, agent fees and loan interest.

What counts as an improvement

An improvement adds something new, increases the capacity or quality of the property, or substantially extends its life. Examples:

  • Building an extra room or floor, or a perimeter wall where there was none
  • Installing a borehole, solar system or lift for the first time
  • Converting a house into apartments
  • Replacing a basic fitted kitchen with a premium one that raises the rent bracket

You cannot deduct the full cost against rent in one year. It is a capital expense.

What happens to capital costs

Two things can follow, depending on the asset:

  1. Capital allowances. Some assets earn an investment allowance on the cost, spread over several years at fixed rates: machinery and equipment such as pumps, generators and furniture, and certain buildings. The capital allowances calculator shows the yearly amount, and fixed assets and capital allowances explained gives the classes. Residential buildings do not qualify for a building allowance, so check which parts of your spending are equipment.
  2. Cost for capital gains. Improvements are added to the cost of the property when you sell, which reduces the gain. Keep invoices and proof: selling a property: capital gains tax steps, and estimate the effect with the capital gains tax calculator.

Grey areas

  • Replacing like with like. A new roof of the same type usually counts as a repair, while a better material may be partly an improvement.
  • Repairs done just after you buy. If you buy a run-down property and fix it before letting, the work may be treated as part of the cost of acquiring it.
  • Mixed jobs. Split the invoice between repair and improvement where possible, and ask the contractor to itemise.

Evidence you need

  1. Contractor invoice with the work described
  2. Payment proof, such as an M-Pesa or bank record
  3. Photos before and after for larger jobs
  4. For eTIMS rules on supplier invoices, see eTIMS and your expenses

Store them in the rental property and tenant register or with the tax records checklist and document log. Claims without documents are the first to be disallowed in an audit: what to expect in a KRA audit.

A worked example

A landlord on annual tax spends KES 40,000 repainting and KES 120,000 on a solar water heating system. The painting is deductible now, reducing profit by KES 40,000 and the tax by about KES 12,000 at 30 percent. The solar system is equipment: instead of deducting KES 120,000 at once, the landlord claims allowances over several years and keeps the invoice for the cost on sale. Run both through the rental income tax calculator.

Frequently asked questions

Can I deduct repairs to a unit I live in myself? No. Only costs for the part of the property used to earn rent are deductible.

Do I need to charge VAT on repairs to residential rentals? Residential rent is exempt, so input VAT on related costs is generally not recoverable. Commercial landlords registered for VAT can claim it.

What if a tenant causes damage? Costs recovered from the deposit are offset against the expense, and any unrecovered balance is a normal repair cost.

Can I deduct the cost of a new fence? A new fence is generally a capital improvement. Repairing an existing fence is a deductible repair.