As part of the tax bill for the year 2021, the Israeli government is about to make a major reform regarding declaring and reporting Israeli rental income – for all landlords!
If approved, every landlord will have to file a rental income declaration in Israel, even when the rent received remains below the exempt threshold.
What is the monthly exempt amount on rental income in Israel?
For information, the monthly limit of exempt rents in Israel is 5,070 NIS (2021). This threshold is revised annually, based on indexation and inflation.
Although this reform concerns rental income, it’s not only that… It will also affect other aspects of real estate taxation in Israel.
What will change with reporting Israeli rental income?
The Ministry of Finance wants to enforce the obligation to report rental income, even where the income is tax exempt. The Tax Authority dont want to tax the income. They just want landlords to declare how much they have earned.
Currently, the law only requires reporting when the monthly rent amount is more than NIS 5,070 per month, and lower amounts are entitled to full exemption. So, if a landlord rents their apartment for less than NIS 5,070 per month, they do not have to pay taxes in Israel, and also do not have to submit an annual tax return.
More about Israeli exempt rental income
An individual who rents residential property can receive an income tax exemption on this income if his total income from rent does not exceed NIS 5,070 per month (as of 2021) and they meet the following requirements:
– The apartment is for residential use only and the landlord has a written a rental contract according to which the apartment is for residential use only.
– It is rented for personal use to tenants who are individuals (i.e., not a business)
– The property is structured to be used for residential purposes (for example, it is not a warehouse, or a store).
– Your total income from the rent is less than NIS 5,070 per month.
– If the landlord rents more than one apartment, provided that the total income from all apartments is less than NIS 5,070 per month.
What if the rental income is higher than the exempt amount?
If the amount of rental income is higher than NIS 5,070 but lower than NIS 10,140, a tax exemption will be granted for only part of the amount. However, for each shekel that the income exceeds the 5,070 threshold, the exemption is reduced by 1 shekel.
For example: Monthly rental income of ILS 7,000:
First: calculate how much the income exceeds the ILS 5,070 threshold: (7,000 – 5,070 = 1,930).
Then: deduct that amount from 5,070 to get your exempt amount: (5,070 – 1,930 = 3,140)
Exempt amount: ILS 3,140
Taxable amount: income above ILS 3,140 taxed at the marginal income tax rates.
So in this example, the monthly income of ILS 7,000 is split up and taxed as follows:
ILS 3,140 tax exempt
ILS 3,860 taxed at marginal rates
Sometimes a landlord owns two properties, of which one was only rented for part of the year. They could often reduce their tax liability by claiming a partial exemption over the year. Contact us for more advice.
What is the purpose of the reform?
Israel’s tax authorities admit that they currently have difficulty tracing unreported taxable rental incomes. They also understand that the partial reporting requirement has created discrepancies in revenue collection. The state has estimated the gap to be in the tens of millions of shekels per year. In their view, an obligation to report rental income will make tax evasion more difficult for landlords.
As a reminder, a false declaration can lead to criminal prosecution and heavy fines.
Important information regarding banks in Israel:
The Israeli banks are under the scrutiny of the Tax Authorities. If they fail to stop tax evasion, they can be penalised with heavy penalties. As a result, the banks often request documentation prior to processing incoming or outgoing payments. They have the ability to block the deposit of rental income or freeze your account, if they have any reason to suspect that you haven’t been reporting Israeli rental income. And to unfreeze the account they may request you to prove that you have filed an income tax return.
A reform also on the sale of apartments in Israel
Individuals who sell there only Israeli property are usually entitled to tax benefits on the gain . However, The Finance Ministry has proposed a reform to reduce the scope of this tax benefit.
Read: Reduced tax benefit period when selling multiple apartments in Israel.
Our opinion on the new tax reform in Israel
– These reforms start from a good intention and aim to increase the transparency necessary for the declaration of rental income in Israel.
– With the digital capabilities and data available to the government, such a reform is necessary.
– This will allow the government to obtain clear and complete visibility on all rental income in Israel.
– The government will be able to know the average rent price in a sector, and will therefore reduce the risk of fraud / false declaration.
– If the government can stop landlords evading taxation, they will have more taxpayers paying into the “pot” to cover the country’s budget. Splitting the same budget between more people could mean an eventual lowering of the tax rates.
Israeli taxation offers several advantages to people wishing to make their Aliya. Before taking the step, it is important to prepare properly and to avoid any tax complications in the future.