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How to Offset Losses From Your Property Investment

Are you incurring losses with your investment property? Did you know, it's actually possible to offset these losses? In this article we will analyse [with a calculated example] how you can offset losses against your business income - and when it’s determined as a business income and not just normal rental income.
inside investment property with text: how to offset losses from investment properties

Question:
Hi, I’m Kate. I run a small trading firm as a sole proprietor where I have earned RM 15,000 a month in business profits. I own two investment properties. Their details are as followed:

Investment Property 1: The Vibe Condominium
Last year, I received RM 1,100 a month in rental income from renting my unit to Jane, a young executive. The unit was rented to her unfurnished. I have incurred RM 13,500 in interest payments, RM 2,400 in maintenance fees, RM 500 in both quit rent and assessment and RM 300 in fire insurance premiums. Hence, I have incurred a loss of RM 3,500 from the Vibe. One of my investment properties accounts is prepared as followed:

No. Items Amount (RM)
1 Rental Income (RM 1 100 x 12 months) 13 200
2 Interest Payments (13 500)
3 Maintenance Fees (2 400)
4 Quit Rent and Assessment (500)
5 Fire Insurance Premiums (300)
Net Profit/(Loss) from The Vibe Condominimum (3 500)

Investment Property 2: The Pariso Serviced Residence
Last year, I received RM 1,800 a month in rental income from renting my unit to a group of 3 students. The unit was rented fully-furnished. I have engaged Atria Student Sdn Bhd, a professional hostel operator to assist me with my collections of rent. Atria does actively provide cleaning, repair and maintenance services to my investment properties to make sure that they well-kept. I paid RM 400 per month for their property services.

Besides, I paid RM 15,300 in interest payments, RM 2,700 in maintenance fees, RM 600 in both quit rent & assessment and RM 400 in fire insurance premiums. Thus, I incurred a loss of RM 2,200 from the Pariso. My investment properties accounts are prepared as followed:

No. Items Amount (RM)
1 Rental Income (RM 1 800 x 12 months) 21 600
2 Atria Student Sdn Bhd (RM 400 x 12 months) (4 800)
3 Interest Payments (15 300)
4 Maintenance Fees (2 700)
5 Quit Rent and Assessment (600)
6 Fire Insurance Premiums (400)
Net Profit/(Loss) from The Pariso Serviced Residence (2 200)

My question is: ‘May I offset the total losses of RM 5,700 incurred from investment properties against my business income?’

You may also want to read: Tax on Rental Income | 5 Rules You Must Know If You Rent out a Property in Malaysia

Answer:
First and foremost, Kate needs to determine, whether or not, her rental income. is to be assessed under:

    a. Section 4(a) Business Income or
    b. Section 4(d) Rental Income

If Kate’s rental collection for her investment properties is assessed under business income, then, she can offset net losses from her investment properties against her business income. If not, Kate is not able to offset these losses against her business income.

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So, what is the basis to determine the above?

The answer lies in Public Ruling (PR) No. 12/2018. It states that: ‘Letting of real property is deemed as a business source if maintenance & support services are provided in relation to the real property. Both maintenance & support services should be comprehensively and actively provided, either by the owner himself or by another person or another firm hired by the property owner.

The keywords are ‘Maintenance & Support Services’.

Thus, for Kate’s 1st investment property – the Vibe Condominium, her rental collection would be assessed under Section 4(d) Rental Income. It is because Kate has rented her investment property as an unfurnished unit to Jane (her tenant) without actively providing maintenance & support services. As such, Kate’s net loss of RM 3,500 from the Vibe would be a ‘Permanent Loss’ and could not be offset against her business income.

Meanwhile, for Kate’s 2nd investment property – The Pariso Serviced Residence, her collection of the rental would be assessed under Section 4(a) Business Income, instead of 4(d) Rental Income. This is because Kate hired a professional hostel operator to help her actively provide comprehensive maintenance & services for her property investment. In Kate’s case, she can offset RM 2,200 in net losses for this investment property against her business income

As such, Kate’s income tax filing would be as followed:

No. Section Source of Income Amount (RM)
1 4(a) Business Small Trading Firm (RM 15 000 x 12 months) 180 000
2 4(a) Business The Pariso Serviced Residence (Loss: RM 2 200) (2 200)
3 4(d) Rental The Vibe Condominimum (Loss: RM 3 500)
Kate’s Chargeable Income 177 800

Kate’s chargeable income would be reduced slightly to RM 177,800.

Overall, it is more beneficial to property owners if their rental collections are to be assessed as a Section 4(a) Business Income over Section 4(d) Rental Income. This is because:

1. Rental Expenses exceed Rental Income:

Property owners are able to recognise them as ‘business losses’. These losses could be offset against their other statutory incomes such as employment, business, dividends … etc and thus, effectively lower the amount of chargeable income & income tax rates to property owners.

2. The utilisation of Unabsorbed Business Loss:

Property owners are allowed to offset any unabsorbed ‘business losses’ from previous years against their statutory income for the current year.

Let us assume, Kate has unabsorbed losses of RM 2,000 from her rental unit in 2017. From the table above, she has a chargeable income of RM 177,800 in 2018. The RM 2,000 in unabsorbed losses for 2017 could be used to further offset her chargeable income of RM 177,800. If it is the case, Kate would report a chargeable income of RM 175,800 in 2018.

3. Furniture, Plant and Machinery:

You may purchase furniture, plant, and types of machinery to earn rental income from your properties. If you are taxed under 4(a) Business Income, you would be entitled to claim capital allowances on these assets. Otherwise, you would be entitled to write these expenses off from your current year’s rental income if you are being assessed via 4(d) Rental Income.

The following table summarizes distinctions of rental income to be assessed via Section 4(a) Business Income and Section 4(d) Rental Income:

No. Distinctions Section 4(a)
Business Income
Section 4(d)
Rental Income
1 The Basis
-Maintenance & Support Services
-Actively & Comprehensively Provided
Yes No
2 Rental Expenses > Rental Income Business Loss Permanent Loss
3 Utilisation of Unabsorbed Business Loss Yes No
4 Furniture, Plant and Machinery Claim
Capital Allowance
Replacement
Cost Basis

Conclusion:

Property investing is a great way to build wealth sustainably over the long run. In addition to rental income and capital gains, there are many tax benefits and strategies that investors could enjoy to not only save on tax payments but also to impress your bankers with your tax filings so that you can obtain more loans to accumulate more properties in the long-term.

You may need customised tax services if your present financial standing is a lot more complex. To search for highly qualified local tax consultants, you may use Joolah.my, a free search tool that quickly connects you to the best accounting, audit, company secretarial firms in Malaysia.