Estate Planning: Mind your properties, owners advised

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on September 2, 2019 - September 08, 2019.

Chee speaking at the Rockwills Estate Planning Conference in Malaysia

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Property owners and investors should be mindful of some of the finer points when it comes to managing rental property and bequeathing assets, says Deloitte Malaysia executive director Chee Pei Pei.

Most property owners are aware of the Real Property Gains Tax (RPGT), or the imposition of tax on the profit derived from the sale of a property. The rate gradually drops for every year the owner holds it, falling to a minimum of 5% from year six and beyond. Such a tax is typically meant to prevent speculation in the property market, which causes prices to inflate in a short span of time.

Chee says property owners need to be mindful of the difference in RPGT treatment between transferring a property in their lifetime and bequeathing it in a will to pass it on to their next of kin. “I would advise caution when it comes time for the beneficiary to sell the property he received. The first transaction — that of the property being transferred from parent to beneficiary in his lifetime — does not attract RPGT. However, the beneficiary who subsequently sells the property some years later will [have to pay the RPGT].

“In this instance, the RPGT will be calculated based on the price of the property when it was purchased by the parent all those years ago, and not the value of the property when it was transferred to the beneficiary.”

She was speaking at the Rockwills Estate Planning Conference in Malaysia on Aug 18.

Suppose a parent purchased a property worth RM200,000 in 1999. He gifted the property to his child that year. When the parent died in 2014, the property was worth RM1 million. Then, in 2019, the child decided to sell the property for RM2 million.

In this scenario, the child would have a significant RPGT burden because the tax would be calculated based on the property’s initial purchase price of RM200,000, and not RM1 million. That means he would be subject to an RPGT of 5% on the RM1.8 million gained, or RM90,000.

Therefore, Chee advises parents to bequeath properties in their wills. So, if the beneficiary decides to sell the property in the future, the RPGT calculation will apply to the value of the property at the point of the parent’s death.

In this scenario, if the parent died in 2015, when the property was worth RM1 million, and the beneficiary sold it for RM2 million in 2019, he would be subject to an RPGT of 5% on the RM1 million gained, or RM50,000.

“One reason this particular difference exists is so that people who owe money or have creditors are discouraged from simply transferring their properties out of their name, thereby denying restitution to their creditors,” Chee tells Personal Wealth.

On the issue of rental income, property owners must be careful not to misrepresent themselves as being in the business of renting out properties. Rent that is made out to be business income for tax purposes typically attracts more tax benefits and deductions, as opposed to renting out one’s property as a private citizen.

“If you can show that you are in the business of renting out properties, any expenses incurred towards the purposes of generating rental income will generally qualify for tax deductions,” says Chee.

Items such as refrigerators, microwave ovens, cabinets, beds and even cooking utensils would likely be claimable in the form of capital allowances, which would reduce the rental income subject to tax.

However, property owners need to satisfy a list of requirements before rental income can be considered business income, says Chee. “The tax authority will want to be satisfied that you are conducting regular maintenance and management of the property. There has to be a comprehensive and actively provided for series of activities before you are considered to be in the business of renting out properties.

“For example, the property owner should keep entrances, staircases and lobbies clean and well maintained at all times. Similarly, any other open spaces — such as car parks, driveways and recreational areas — should also be well managed. It is not enough for you to simply hire a few security guards and say that you are in the business of renting out property.”