Some investors have been asking us about the tax benefits they may enjoy if they invest real estate through a company. General discussion about this and other advantages/disadvantages of investing through a company was posted in “Should you invest in real estate through a company?”. Common understanding is that a company enjoys more deductibles than an individual in terms of tax benefits.
Most investors understand also in Malaysia if you have 4 or more rental properties, then your rental income can be considered as a business income. (Details about this can be found from the special treatment for a company where rent can be regarded as a business source under section 5 of the public ruling of income from letting of real property.) What most people don’t know is that there are terms and conditions that restrict you to enjoy tax advantages on this “business income”, particularly the definition of an investment holding company.
If you are just started to invest in real estate or you just owned a few properties, you better calculate carefully before you incorporate a company to invest in real estate.
Investment holding company
A company is considered as an investment holding company if more than 80% of the company’s income is rental income or income generated from investment properties that it holds. Regardless how many properties a company owns, as long as its business income other than rental income is less than 20% of the total income, it is considered an investment holding company. In other words, you do not need to have 4 rental properties in order to create an investment holding company.
However, allowable deductibles for investment holding company are much less than a normal company – only 25% of the total operating expense is deductible, and this amount should not exceed 5% of the total rental income.
Now we understand why investment holding company is excluded from section 5 of the public ruling of income from letting of real property.
If your intention to create a company is to hold all your properties and enjoy the deductibles that individuals cannot enjoy, most likely you will be disappointed. Check again with your accountant or tax consultant before you insist to do so.
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{ 3 comments… read them below or add one }
Hi OngKL. Thanks for the very insightful article. Can I ask, if an individual person has 4 or more rented properties, can he treat the rental as a business income?
Hi Addaze,
If an individual owns a business as a sole proprietor, yes, the rental income can be considered as a business income under the special treatment of the public rulling (http://www.hasil.gov.my/english/pdf/ruling(1)2004.pdf). Otherwise it is considered as a rental income of the individual.
Cheers
Hi,
After reading your informative article, I conclude that not many tax advantages holding properties under a property holding company. I would like to ask is it wise to keep on holding the properties under individual name since one’s property investments might be expanding? Is it risky to have expanding property investments under individual names? Is there any other way to enjoy more tax benefits if investing in holding company does not bring as many tax benefits as one might thought earlier. I hope you could share some of your insights in this doubt.
Thank you.