Effect of capital gains tax on performance of real estate businesses in Mavoko municipality, Machakos County

Abstract

The current study sought to establish the effect of capital gains tax on performance of real estate businesses in Mavoko Municipality, Machakos County. Capital gains tax was first introduced in Kenya in the year 1975 but suspended later in 1985 with an objective of spurring investment in real estate as well as in the securities market. The real estate property market has been booming since its suspension in 1985. However, after nearly 30 years of suspension by the Kenyan Parliament, Kenya Revenue Authority announced to reintroduce the tax back with an applicable rate of 5% of the net gain and become effective on 1st January 2015. The introduction of CGT in our tax system was met with a lot of opposition. One of the strongest arguments against the reintroduction of CGT was that it will affect the ‘first time’ and ‘young’ home-buyers on the decisions to resell their homes in order to buy bigger and better ones, particularly when such buyers have to take out mortgages to support the new purchase. The study used descriptive research design where the target population under study constituted all the 143 employees of 31 real estate companies operating in Mavoko and which are registered with relevant department of Machakos County Government. The study used primary data which was collected using an open and closed ended likert scale questionnaire. The data was then analyzed using SPSS V23 where correlation coefficient was used to determine the strength and direction of the relationship between the dependent variable and each of the independent variables. Coefficient of determination was used to measure the proportion of variance in the dependent variable that can be explained by independent variables. ANOVA, T- and F- tests were used to test the significance of the model in measuring the relationship between capital gains tax and performance of real estate businesses in Mavoko Municipality, Machakos County at 95% confidence level and 5% significant level. The study established that there was a significant positive relationship between capital gains and performance and a non-significant positive relationship between capital allowances and performance. However, significant negative relationship between performance and lock in effect was established. Performance and capitalization effect were found to be having an insignificant negative relationship. A conclusion was therefore made that there exists a significant relationship between capital gains tax and performance. A recommendation was made that real estate businesses do not need to put much resources in claiming for the capital allowances and deductions since though they use a lot of resource to claim them, their contribution to overall performance is insignificant.