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.
12 Comments
abdaze
August 5, 2009Hi 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?
ongkl
August 7, 2009Hi 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
Jess
October 2, 2009Hi,
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.
Salam Chowdhury
January 24, 2011We are looking good location appartement at Johor Bharu
Schumakay
January 19, 2012Hi,
If using investment company to buy new property, will it be different from buying it individually?
As personal can only loan max 70% for 3rd property onwards, I wonder if this could be another way for property investor to get more leverage from banks?
Thanks !
MF
August 6, 2014from my understanding of IHC, if total taxable income for that particular year for your IHC is less than RM500,000, then your tax only 20 %(personal : 26%).
You can use IHC as well to get loan on individual name for 3rd house with 90 % by transferring your existing property to IHC.
1st house 90 % loan
2nd house 90 % loan
3rd house 70 % loan
transfer 1st or 2nd house to IHC and you will able to have 3rd house with 90 % loan margin. Transferring personal property to IHC is like refinancing, but with less stamp duty percentage ( most likely 50 % off) if your holding is more than 70 % in that IHC and NO RPGT occurred. You just need to make sure your property that need to be transferred to IHC is already appreciated at least 40 % from original price. Why? because IHC loan margin only cap to 60-70% of latest market value.
please correct me if i’m wrong.
thanks
JIN
May 29, 2015may i know the cost to maintain an IHC for each year? What are the estimation cost likely be charged?Thank you.
ongkl
May 30, 2015Hi Jin,
It depends on how much work required to maintain the company, e.g. number of transactions, properties, resolutions, revenue, etc. As a rough guideline, an IHC with less than 5 rental properties that generate less than RM25k annual revenue requires minimum RM5k every year to pay for taxes, corporate secretary & audit fees.
Irene Teng
July 29, 2015Hi, would like to ask if can set up an IHC to buy property immediately and what is the requirements of bank to get loan under IHC?
My friend already owning 2 residential properties and would like to buy the 3rd or 4th using IHC, as thinking that it can get more loan like 80 to 85%? Is that way possible and isit ideal to form IHC with the objective?
Thank you
ongkl
July 29, 2015Hi Irene,
Normally banks will require company’s financial reports for the past 3 years, so it is very rare a newly setup IHC can get loan from banks immediately.
If I am not wrong now even IHC is subject to the 70% LTV limit of 3rd residential mortgage. You may want to check with your bankers again.
henry
December 18, 2015It is 60% financing for residential property if under IHC, but still 80% for commercial property
KCLau
December 18, 2015Hi Henry, yes you are right. Thanks for pointing out.
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