Expenses Relating To Rental Of Real Property (Pt. 2)

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Having touched on the tax-deductible expenses, it is also important to know what expenses are NOT ALLOWABLE. Typically, initial expense is not allowed a deduction from income of letting of real property assessed under paragraph 4 (a) or paragraph 4 (d) of the ITA since that expense is incurred to create a source of rental income and not incurred in the production of rental income.  Examples of such expenses include:

  • Costs of obtaining the first tenant for the property, such as:
– Advertisement;
– Introducer’s commission;
– Legal fees incurred for the preparation of tenancy agreement;
  • Other expenses incurred prior to the property being rented out; or
  • Renovation and improvement costs.
In the case of expenses incurred prior to the property being rented out, particularly relating to annual property expenses such as quit rent, assessment or insurance costs, then the proportion of the expenses in respect of the period before the property is rented out is not deductible and have to be adjusted accordingly.


However, a distinction has to be drawn between what expense is deemed to be ‘repairs and maintenance’ (which is tax-deductible) and what is ‘renovation or improvement’ (which is NOT tax-deductible). Typically, an expense is deemed to be ‘repairs and maintenance’ if it is incurred on ordinary repair to maintain or restore the real property in its existing state. It will not materially add to the property’s value nor substantially prolong its useful life, but merely to keep it in good and efficient operating condition.
In the case of ‘renovation or improvement’, the reverse would then apply, ie. the expense incurred would:

  • materially add to the property’s value;
  • substantially prolong its useful life;
  • adapt the property to a new or different use; or
  • enhance the property’s income-generating ability.

What happens during the period when the property is not rented out? As explained above, expenses incurred prior to the property being first rented out, are not allowable in calculating the adjusted income from the letting of that property. However, if the property which is previously rented out but left temporarily unoccupied while you are looking for the next tenant, the expenses incurred during the period of unoccupancy will still qualify for deduction. This is on the condition that the property is being consistently kept in a tenantable state and is ready to be let out at any time. How long then, can a property be ‘temporarily’ left vacant and yet the property expenses qualify for a tax deduction?

The IRB’s Public Ruling 4/2011 further explains under what circumstances where the expenses incurred for the period the property is temporarily not rented out will be allowable. The circumstances are:
  1. repair or renovation of the building;
  2. absence of tenants for a period of 2 years after termination of tenancy;
  3. legal injunction or other official sanction; or
  4. other circumstances beyond the control of the person who lets out the real property.

Under the above circumstances, the expenses for the period the property is not let out are allowable, provided that the property is maintained in good condition and is ready to be let out. Of course, having explained the concept of tax-deductibility of expenses against rental income, one must never forget or ignore the underlying basis for claiming for a tax -deduction, ie. the need to keep proper records and documentation relating to the claim for those expenses. When it comes to a tax audit, the IRB’s basis of allowing you a tax deduction for the expenses claimed would all be about the availability of EVIDENCE.

About Richard

Richard Oon Hock Chye has more than 25 years of experience in taxation and business advice, with particular expertise in Malaysian property law. He began his taxation career with Deloitte Touche Tohmatsu, a ‛Big Four’ accounting firm, before starting his own practice, ConsulNet Tax Services Sdn. Bhd., in 1996. He is currently the National Tax Director of TY Teoh International, one of the leading consulting service providers in Malaysia. It is a member of the MSI Global Alliance, a global network of more than 250 independent legal and accounting firms, in over 100 countries. Richard sits on the board of two companies listed on the Main Board of Bursa Malaysia, as an independent non-executive director. He is also a regular contributor to several magazines and publications, and has shared his tax expertise on numerous occasions with organisations and property developers. As well as being a member of the Malaysian Institute of Accountants (MIA), Richard is a fellow member of both the Association of Chartered Certified Accountants (ACCA) and the Chartered Tax Institute of Malaysia (CTIM). He is a Certified Financial Planner (CFP) and holds a tax agent licence issued by the Ministry of Finance. Richard is also the author of the book, ‘Every Property Investor’s Guide To How To Pay Less Tax Legally’.

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