ST ILLUSTRATION: MANNY FRANCISCO
SINGAPORE – Many property investors are still clueless about the true cost of owning additional properties, judging by the increase in the number of landlords who have been taken to task by the taxman over their rental income.
These owners, who were caught for either under-reporting rental income or reporting none at all, probably thought that investing in properties would be a sure-win deal so long as the rent from leasing out the units was more than enough to fund the mortgage payments as well as generate some extra pocket money.
But what they do not realise is that, like with any other investment, dabbling in real estate comes with inherent risks, especially if the investors have not considered all the possible costs that can erode their rental income.
While many landlords are able to estimate and set aside money for upfront costs such as repairs, maintenance and fees for securing tenants, only the truly savvy ones will factor in the taxes as well as the market conditions that can affect their rental income.
Being ignorant of taxation rules is probably the main reason more landlords have ended up under the radar of the Inland Revenue Authority of Singapore (IRAS).
In its latest tax audit between 2024 and 2025, it probed 793 property owners after their tax submissions were flagged because of discrepancies in their rental income reporting.
In the end, 422 landlords were found to have committed various wrongdoings such as under-declaring rents or claiming unrelated expenses, as well as the more serious breach of failing to report their rental income altogether.
As a result of the latest audit, IRAS recovered $4.8 million in additional taxes and penalties, or close to four times more than the $1.3 million recovered in its previous exercise in 2023.
During the 2023 audit, which covered three years, IRAS probed some 450 landlords and eventually took about 280 of them to task.
It does not pay to invest in properties before finding out what your legal obligations are because huge penalties await those who try to avoid paying due taxes, such as those who took part in the infamous “99-to-1” sham deals to skirt the additional buyer’s stamp duty (ABSD).
In the case of errant landlords, those who are caught submitting tax returns containing errors, omissions or discrepancies can be ordered to pay penalties of up to 200 per cent of the undercharged tax amount.
Many landlords end up in trouble because they are ignorant of these four important taxation rules that govern their property investment.
They are liable for two different taxes
Some errant owners did not report their rental income because they mistakenly thought that paying property taxes, which have recently been hiked, meant they did not have to report their rental income.
That they could commit such a huge mistake means that they are probably not aware of all the costs that are associated with real estate investment and could end up facing losses if the numbers do not add up.
The calculation for property tax is determined by the annual value of the property, which is decided by the IRAS based on market rentals of similar or comparable properties in the area.
Diligent investors would check this with the sellers before buying the property, or they can pay a small fee to check online with IRAS.
Take, for instance, a three-bedroom apartment with an annual value of $39,000. An owner who lives there would pay a much lower “owner-occupied” property tax of $918, while property investors would pay $5,400 for renting out such units.
Those who invest in landed properties are likely to pay even higher property taxes because such homes can fetch rents of $20,000 to $30,000, if not higher.
Take, for instance, a house that has an annual value of $198,000. Those who buy and lease out such properties would have to pay an annual property tax of more than $60,000.
Although the amount of property tax can be deducted from your rental revenue, the tax on the balance will be specific to each individual because the final payable tax will depend on your total net income, which includes earnings from other sources, such as annual salary and bonuses from employment.
This means that if you earn a high salary, you may have to pay a lot more tax on your rental income, as your total annual income would hit the higher tax brackets – such as over $280,000, which attracts a tax rate of 20 per cent or more.
However, If you are a retiree with no other income, you will probably be taxed a lot less, with the payable tax depending on your net rental income.
Tax is based on your share of the property
Some people let their non-working spouses handle the investment properties and assume that the entire rental income can be reported under the spouse.
But IRAS says all owners of investment properties have to report their portions of the rental income based on their legal share. For instance, two joint owners will each have to report 50 per cent of the rental income.
The obligation to report rental income is determined by the law, and not by the whims and fancies of the owners, who do not get to choose who should report the income and pay the tax.
Similarly, they have to report the actual rental income stated in their official lease agreement, and not an amount based on their own estimates.
Only expenses related to the lease can be deducted
As owners need to pay bank mortgages and renovation costs for investment properties that are leased out, some of them mistakenly assume that these expenses can be deducted from their rental income.
But the rules for tax deductions are far stricter because claimable expenses are limited only to those directly incurred in earning the rent, such as condo maintenance fees, real estate agent fees, insurance and property tax.
To avoid making incorrect deductions, owners should check the IRAS website for the common expenses that they can claim.
If they do not want the hassle of filing claims, they can opt for the convenience of filing “deemed rental expenses” based on 15 per cent of gross rent received.
Even when they do that, they can still claim the bank interest on their mortgage. Still, many landlords may end up better off claiming the 15 per cent deemed rental expenses, as the amount could be more than the actual expenses.
“Source:[Many landlords end up in trouble because they are clueless about rental rules] © Singapore Press Holdings Limited. Permission required for reproduction”
