Increase in Tel Aviv Arnona for short-term rental apartments

Arnona Cabinet Expert Comptable Dray & Dray

All you need to know about the Arnona increase in Tel Aviv for short-term rental apartments

The municipality of Tel aviv wants to impose a special tax for short-term rental apartments on Tel Aviv Airbnb and Booking.
  1. What exactly does it involve?
  2. How will City Hall find Airbnb apartments operating in the city?
  3. Which apartments will be included in the new classification?
  4. Can the municipality impose its own rates?
  5. Is this "ultimate" solution really an obstacle for homeowners?

Questions & Answers on Tel Aviv municipality's solution to the out-of-control Airbnb apartment market.

See also: Taxation of short-term apartment rentals in Israel See also: How is property income taxed in Israel?

Current situation

The municipality of Tel Aviv has announced its intention to increase the municipal tax (Arnona) on residential apartments rented on a short-term basis via Airbnb and Booking. According to the municipality, this proposal follows the increase in the number of residential apartments rented on these sites for commercial purposes, as well as the damage caused to the quality of life of the city's residents who live near these apartments. In 2018 alone, there were around 2.2 million tourists in the city. A review by the Tel Aviv Municipality's Center for Economic and Social Research found that rents in the city had risen due to the increased activity of short-term Airbnb apartments. Mainly in the heart of Tel Aviv and Rothschild Boulevard, in the Old North and in neighborhoods such as Kerem Hatemanim and Neve Tzedek. Given this new "threat" posed by the municipality, several key questions are raised:

How will the municipality locate Airbnb apartments operating in the city?

This is an open market that is not currently regulated by any government authority. City officials explain that if the proposal is accepted, the municipality will use a system that monitors apartments on the Airbnb site and will monitor the activity and bookings of certain apartments throughout the city until they prove that their activity is commercial rather than temporary. Similarly, the municipality is likely to call on local residents to help with this process. The known disadvantage of this method is the opening up of "settling of scores" between conflicting residents.

How many Airbnb apartments are operating in Tel Aviv today?

According to existing data, around 10,000 properties in Tel Aviv are offered for rent on various platforms. 80% of the rented properties are whole apartments at an average price of around 160 $ per night.

Which apartments will be included in the new classification?

According to the city council's decision, properties rented for a short period of more than 90 days a year will be subject to property taxes equal to those of 4 and 5 star hotels. According to estimates, this will mean a property tax charge equivalent to three times the amount currently paid by owners. See also: Taxation for owners of several apartments in Israel

Can the municipality set the rate on its own?

No. The decision is in the hands of the Ministry of the Interior and the Ministry of Finance.

How long do we have to wait until the initiative is approved?

Following a series of approvals that need to be cleared, the process is expected to take around six months to come into effect. In practice, it's reasonable to assume that with the upcoming elections in Israel, as well as the lack of knowledge about the candidates for the posts of Interior Minister, Finance Minister and even Tourism Minister, we shouldn't see the effect of this initiative right away.

Can retroactive municipal taxes be levied?

The Tel Aviv municipality has stated in this regard that the tariff for these apartments, as approved by the municipality, will only apply from 2019. Subject to the approval of the Minister of the Interior and the Minister of Finance, which is expected to be provided in accordance with the law until 18.8.19. In any case, the intention is to apply the rate only from the second half of 2019. The Eurovision Song Contest will therefore not be affected.

Why such an abrupt and drastic change? ?

As a short-term solution, these apartments have an obvious advantage in that there aren't enough hotels in and around Tel Aviv. But the municipality's vision is one of the future and what will happen in a few years' time. Here are some of the reasons why:
  1. The rental apartment sector is unregulated, unmonitored and unregulated, which is not good for the city.
  2. Many apartments leave the rental market for Israelis and serve only tourists.
  3. The proliferation of such apartments in central locations is damaging the urban fabric and contributing to rising housing prices.
  4. The mayor's aim is to balance the wonderful flowering of tourism with the quality of life of the city's residents and the price of accommodation.

Consequences in the short and medium term

Assuming the number of tourists to Tel Aviv continues to grow as it has today. The municipality also wants a piece of the action. But is this the right solution? What will apartment owners do with this reform? (If it passes!). Will they go back to renting on a long-term basis, or will they raise the price of Airbnb and Booking rents to earn the same margin? Some well-placed apartments will be able to afford it, others less so... Turning to long-term rentals is certainly not the right solution, for several reasons:
  1. There are far too few requests for long-term rentals compared to short-term rentals in Tel Aviv.
  2. The prices offered are not in line with the standard of living of Israelis who want to rent for the long term. Israelis prefer to rent in the suburbs.
  3. Profit margins on long-term leases are not comparable with short-term leases.
  4. Capital gains on Tel Aviv real estate are becoming increasingly rare. This is forcing investors to make the most of their acquisitions, by renting on a short-term basis via Airbnb and Booking, even if it means paying more for Arnona.

Your questions, our advice

  • Will other municipalities follow Tel Aviv's example?
    • It's unlikely, Tel Aviv remains a tourist center that few cities in Israel have, so it would be a reckless risk.
  • Will the various ministries respond to the Tel Aviv municipality's request?
    • Nothing is less certain. With the upcoming elections, everything is "open".
  • Is Tel Aviv the most attractive and profitable city for short-term rentals?
    • Jerusalem seems to be the city that never sleeps. Or rather, it never has an off-season, thanks to its central and religious location.
  • Israel's real estate sector has been running out of steam for some time now. Rising property taxes, tougher banks, purchase prices that no longer correspond to reality, municipal taxes getting in the way... Where should you invest after all?
    • Several investment solutions are available. Faced with such complexity, it's essential to surround yourself with the right people.

Do you have questions about the taxation of residential or commercial rentals in Israel?

Don't hesitate to contact us, we specialize in real estate taxation in Israel.




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