According to the Israeli law, people who own an apartment or apartments in Israel are liable to pay two types of taxes:
A relatively “new” type of tax, as of January 1, 2017, which is paid by owners of multiple apartments (the tax is known as the “Third Apartment Taxation Law”). This tax does not depend on the question of whether the apartments are leased and is paid on account of the ownership itself. We published an additional article on this type of tax. Several petitions have been filed against this tax with the High Court of Justice. The law was canceled by the High Court of Justice on August 6, 2017.
The second type of tax is imposed on the rent paid for leasing the apartment or apartments. This is the topic of this article.
The possibilities described in this article regarding the taxation of rent from the leased apartment(s) are only relevant to individuals who own an apartment and not to limited liability companies.
An individual who generates income from rent may choose between four different possibilities:
Exemption
If the individual’s income from rent (the total income from all of the individual’s apartments, including those used for business purposes, such as apartments leased by law firms) exceeds NIS 5,010 per month (this amount applies to 2017), the individual is entitled to a full exemption from tax on rent.
The exemption is conditional upon several conditions:
- The apartment is intended to be used as a residential apartment.
- The apartment is not recorded in the lessor’s business’ “books.”
- The apartment is leased to a lessee who is an individual, rather than a limited liability company, association, nonprofit organization, etc.
- The apartment is used for the lessee’s residential purposes only, and the lessor has a lease that proves that the apartment was leased for residential use only.
The calculation of income from rent (in the context of exemption) will include all of the revenue generated by the household from rent (namely the two spouses and their children up to 18 years of age).
Partial Exemption
If the individual’s income from rent (the total income from all of the individual’s apartments, including those used for business purposes, such as apartments leased by law firms) exceeds NIS 5,010 per month, but less than NIS 10,020 (these amounts apply to 2017), the individual is entitled to a partial exemption from tax on rent.
The partial exemption is calculated as follows:
- NIS 5,010 is deducted from the monthly income from rent (this is the exemption threshold value). The difference is defined as the Excess Amount.
- The Excess Amount is subtracted from a total of NIS 5,010. The difference is defined as the Exemption Amount.
- The Exemption Amount is subtracted from the monthly income. The difference is defined as the Taxable Amount.
For example, a person who generates income from rent equal to NIS 7,500 (higher than the exemption threshold value of NIS 5,010 and lower than NIS 10,020):
| Stage | Description | Amounts |
| Stage 1 | Amount of monthly income from rent generated from residential apartments | 7,500 ₪ |
| Exemption Threshold Value | (5,010 ₪) | |
| Difference = Excess Amount | 2,490 ₪ | |
| Stage 2 | Exemption Threshold Value | 5,010 ₪ |
| Excess Amount | (2,490) ₪ | |
| Exemption Amount | 2,520 ₪ | |
| Stage 3 | Amount of monthly income from rent generated from residential apartments | 7,500 ₪ |
| Exemption Amount | (2,520 ₪) | |
| Taxable Amount | 4,980 ₪ |
The tax paid by the taxpayer will be equal to the employee marginal tax rate, which incorporates all of his income. In principle, with regard to income from rent, the minimum tax rate is 31% (excluding taxpayers who, in that tax year, are 60 years of age, for whom the minimum tax rate is 10%).
The lessor may take into account the regular expenses borne by him to obtain the rent, such as repairs carried out in that tax year, the fees of the attorney who drafted the lease, etc.
The expenses will be taken into account on a pro rata basis (as the taxable amount out of the total income from rent), and they will reduce the taxable amount, and, accordingly, the amount of tax.
If the individual’s income from rent (the total revenue from all of the individual’s apartments, including those used for business purposes, such as apartments leased by law firms) exceeds NIS 10,020 per month (this amount applies to 2017), the individual is not entitled to exemption from tax on rent.
Reduced Tax Rate (10%)
An individual may choose to pay a reduced tax rate of 10% of his income from rent.
The reduced tax rate is subject to the following two conditions:
- The apartment is intended to be used as a residential apartment.
- The income from rent does not qualify as “business income.”
Owners who opt for this track must pay tax for all of their income from rent, without any expenses being taken into account, that was incurred to obtain the rent (such as the costs of repairs/renovations, attorney’s fees, etc.).
Moreover, those who choose this track are required to pay the previous year’s tax by January 30 at the latest.
Tax Brackets
Under this track, the Taxable Amount will be calculated as follows: all income from rent net of expenses incurred to lease the apartment(s). The tax paid by the taxpayer will be equal to the employee marginal tax rate, which incorporates all of his income. In principle, with regard to income from rent, the minimum tax rate is 31% (excluding taxpayers who, in that tax year, are 60 years of age, for whom the minimum tax rate is 10%).
Lessors should check whether it may be more favorable to them to choose the Tax Brackets Track (because their tax liability could be lower under this track) if:
They are not entitled to the Exemption Track and
They purchased the apartment(s) in the last few years and
To finance the acquisition of the apartment or apartments, they had taken out a mortgage (which is yet to be repaid).
Are you interested in consulting or in additional guidance? Please contact us.
Note:
This article provides general and preliminary information only and should not be construed in any event as legal counseling and/or as a substitute for legal counseling in respect of any case and its circumstances.
The above should not be relied upon without consulting with an Israeli lawyer before taking any action or making any decision. The above is true as of the date of its composition, and its veracity may change from time to time.
Distribution and/or duplication and/or photocopying of this document and/or part thereof without permission are prohibited.
