Real estate in Israel: The tax net is tightening around owners of several apartments.
Israel's real estate landscape has undergone a small tremor that could well turn into a real earthquake.
In the wake of recent court rulings affecting the real estate sector in Israel, the tax authorities have tabled a bill that is, to say the least, "aggressive".
And this project is not going to please Israel's property owners and real estate players.
A distinction that can cost several hundred thousand shekels every year
To understand the real impact on homeowners, it's important to understand how Israel's tax system works.
Israel's tax system operates in progressive tax brackets. Just like in France. The difference is that in Israel, taxes are paid individually, not by tax household.
Each level is subject to a different tax percentage (see table below).
These tiers are called "tax brackets" - מדרגות מס הכנסה, and are updated annually by the Israeli government.
Where does your money come from?
In Israel, there is a difference in the source of your income. We therefore make a distinction between :
- Income from a commercial activity, known as "active" income.
- Income that "falls due every month", such as monthly rent or royalties, is considered "passive" income.
Each of these sources benefits from different tax brackets and levels, as shown in the tables below:
1. Tax bracket for active income :
2. Tax bracket for passive income :ALSO READ: How do you calculate tax on property income in Israel?
Taxation at 10% will soon be a myth
Owners of residential apartments in Israel often opted for this type of investment because taxation was so low.
Owners are free to choose between several tax regimes, and can opt for the 10% flat rate.
This flat rate applies to totally passive residential income. This implies that the apartment owner has no "commercial involvement" in the management of his real estate assets.
In other words, rents fall every month "without doing anything", and landlord involvement is very remote.
Sometimes even 10% is too much
This extremely advantageous and inexpensive package is often the "default choice" for homeowners.
However, this package does have a few disadvantages. You can't recognize any expenses.
It turns out that very often, if a thorough analysis is carried out, owners may not pay taxes at all.
We recommend that apartment owners contact us to analyze their situation. We can optimize their rental income for tax purposes.
Israel's tax authorities have ruled
This low level of taxation is very attractive, investors found themselves owning dozens of apartments.
In their annual tax return, they opted for the 10% regime. This gave them a very comfortable after-tax return.
The Israeli government has decided to put an end to what is, in their eyes, a tax anomaly.
According to their position, a person cannot own several dozen apartments without being involved in the "day-to-day" management of his or her business. In other words, the tax authorities consider that owning several apartments is akin to running a business.
As a result, owners in this situation can no longer choose the 10% plan.
As mentioned above, this plan is only granted when there is no direct and regular involvement on the part of the owner.
What are the numbers?
The position of the tax authorities is now clear:
- If you have fewer than 5 apartments, you can, in theory, continue to choose the 10% tax option.
Except in certain cases, where the tax authorities will still consider this income as an asset. Depending on the circumstances and your involvement.
- If you have between 5 and 9 apartments, you'll have to prove to the tax authorities that it doesn't meet the criteria of a commercial enterprise.
In other words, to qualify for the 10% scheme, you'll have to convince the authorities of your low involvement.
As our firm specializes in negotiating with tax authorities, we recommend that you use our services to negotiate this aspect.
More than 10 apartments? It's going to be a hefty bill
- If you have more than 10 apartments, you have no choice.
The tax authorities have decreed that having more than 10 apartments means having a commercial activity.. As a result, you will be taxed according to active income levels, up to 50%.
We recommend that you get in touch with us as soon as possible to take charge of your property portfolio. A proper study of your situation can help you avoid many unpleasant surprises.
What choices do investors have?
With taxes on residential income reaching record highs (up to 50%), it's easy to argue that investors are looking for other investment sectors.
At present, long-term rental profitability is between 2.3% and 3% in Israel's major cities. In other words, if you have to pay 50% on your income, there won't be much left for the owners in the end. At least, not enough to repay the bank every month.
If you're going to be taxed like a business, you might as well enjoy the benefits too.
We recommend that investors turn to retail property - נדלן עסקי - or short-term rentals. Profitability can be as high as 7 to 10% in these sectors. And all with the same level of taxation.
Our firm can present you with some very interesting investment prospects. Contact us to discuss your options.
Your questions - our advice
- What happens if the apartments are managed by a rental management agency?
- If the rents received meet the criteria of a commercial activity, do we have to pay Bitouah Léoumi (social security contributions)?
- Can an owner with a "business" reclaim VAT when buying an apartment?
- Is it more advantageous to buy the apartments via a חברה company?
- What are the risks of failing to declare rental income?
- How many years back can the authorities tax you on?
In a nutshell:
The tax authorities have completely changed the rules of the game.
It's a safe bet that renting apartments over the long term is no longer so profitable. It's advisable to look into other investment possibilities to limit your tax exposure and optimize your profitability.