Tax deduction for bank interest in Israel
Residential apartment owners are currently experiencing a sharp rise in interest rates on their bank loans.
This year, some people find themselves paying double or triple the interest on the loans they took out to buy their apartments. These people should know that it is possible, under certain conditions, to obtain a tax advantage for the interest paid on these loans.
This credit can be deducted from the following items:
1. Rental income from rented apartments.
2. Professional activity carried out in the property in question.
3. Deduction of bank interest from capital gains on resale of property.ALSO READ: Taxes in Israel: taxes on property income
Bank of Israel interest rate increases
Increases in Bank of Israel interest rates have a direct impact on mortgage interest rates and on borrowers' monthly repayments.
The interest on these loans and mortgages represents a significant proportion of the total cost of acquiring the apartments, although it is paid monthly over the term of the financing or mortgage and is taken into account each year as bank interest expenses in Israel for calculating property tax.
Under the Income Tax Act and the Property Tax Act, bank interest payments in Israel can be deducted under the following conditions:
Expenses deductible from rental income :
When an apartment is rented for residential use and the rent is not considered a business activity, bank interest charges in Israel can be deducted from rental income, depending on the tax regime chosen for rental income, as follows:
- "10% tax rate". - In this case, tax is paid on the total amount of rent received, and the owner cannot claim expenses.
Remember that the tax due (10%) on income received in 2022 must be paid by January 31, 2023.
However, this year it is worth reassessing whether it is better to pay tax or declare rental income under the normal regime below.ALSO READ: How can I avoid paying rent tax in Israel?
2. "Exemption system
In this case, it is possible to benefit from full tax exemption up to a ceiling of NIS 5,471 per month for the 2023 tax year, and under this scheme there is no need for deductible expenses, as the amount of revenue is tax-free anyway.
However, if the total expenses for reduction, interest and so on exceed the rental income and there is a rental loss, it is advisable to submit a declaration under the normal regime and benefit from this loss as a deductible expense when selling the apartment.
If you don't, there's no turning back.
3. "Actual flat-rate system (income minus expenses)
Under this system, rental income is calculated by deducting rental-related expenses, including interest paid on loans taken out to purchase the apartment.
The result of this calculation may be a small profit on which tax will be less than 10% of gross income, or even a loss on which no income tax is payable.
This loss can be carried forward to future years as a deductible expense when calculating tax on the sale of the apartment, and/or carried forward as a loss on rental income in subsequent years.READ ALSO: 10% IN TAXES IS ALREADY TOO MUCH!
GOOD TO KNOW!
In the same tax year, losses on one apartment can be booked against the rental of another.
Don't opt to pay 10% right away, but make the most of your rental income by paying less tax.
Do you have a question?
The choice of taxation method
In view of the above, the choice of taxation method is of great importance, and needs to be reassessed every year.
Indeed, in cases where there are high interest expenses, choosing the tax exemption method or even a method of taxation with a reduced rate of 10%, as mentioned above, do not allow the expenses to be deducted and may result in higher taxation than taxation under the regular method in the current year or on future sale.
In addition, the creation of rental losses will be considered as an expense for future years to offset profits from property rental, as well as a deductible expense when the apartment is sold in the future.READ ALSO: COMMERCIAL PREMISES IN ISRAEL - IS IT BETTER TO INVEST IN A SCI OR IN YOUR OWN NAME?
Bank interest in Israel on capital gains
In the sale of apartments and other properties, bank interest charges in Israel will be deducted for the loans taken out to finance/mortgage them when calculating capital gains tax:
Article 39A of the Real Estate Tax Act stipulates that actual interest payments will be deducted when calculating the capital gain on the sale of real estate rights, including the sale of a residential apartment, subject to the following conditions:
- Actual interest costs are not legally deductible. (In this case, the interest must be deducted each year with the rental income).
- Interest costs were incurred from the day of purchase until 90 days after the sale.
- The loan was taken out for the purchase/improvement of real estate rights.
- The loan was taken out shortly before the purchase/improvement of real estate rights.
- The loan was not obtained by a close relative.
Exemption for actual interest expenses
In accordance with tax circular number 16/2003 on "Exemption of actual interest expenses in the calculation of capital gains on the sale of real estate rights", under certain conditions, it is possible to claim the deduction of interest expenses on a private real estate loan when calculating capital gains on the sale of real estate intended for private use, such as an apartment.
On the one hand, in accordance with the above-mentioned directive, actual interest expenses that have been paid will be deducted. For this, annual approvals must be obtained attesting to the actual payment of interest to the bank.
On the other hand, in accordance with Directive 5/2007, the application of the "exemption route" or the "regular route" has been chosen for rental income, and then the apartment is sold. Financing costs which were necessary for the deduction or which could have been deducted will not be deducted as selling costs in the calculation of the capital gain.
It should be noted that this instruction is currently the subject of a class action in which the argument has been raised that it does not apply to a person who has chosen the exemption route.
Interest expenses for home-based workers
Self-employed people who work from home can consider interest relating to their professional use of the home as a recognized expense.
However, care should be taken, as the more the home's main use is for commercial purposes, the less tax exemption there will be when the home is sold.
In a nutshell:
It is regrettable that interest expenses for the loans have increased considerably last year, but a tax planning can at least help reduce these expenses.
Whether in calculating rental profits and losses or during the sale of the property in the future.
Your questions - our advice
- Is it worth paying back your loans?
- Towards a real estate upheaval in Israel? Where to invest?
- Is it more advantageous to buy apartments through a company?
- What expenses can be deducted under the actual flat-rate scheme?
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