With a growing shortage of homes in Israeli cities, the government introduced low tax rates for landlords on their Israeli rental income. This encourages them to rent out their apartments which may otherwise be left vacant. So, what is the tax on Israeli rental income for an individual?
Non-residential rental: marginal tax rates
Short term lettings: marginal tax rates
Residential rental: A landlord can choose any of the following three tax routes:
1 – Marginal tax rates on the net rental income (after expenses)
2 – Flat 10% tax on the gross rental income (before expenses)
3 – Tax exempt route on small incomes
1 -Marginal tax rates
The landlord will pay income tax at the standard marginal tax rates. So depending on their age, and their other incomes, the rate of tax could be fairly high. However, on this route, the tax payer has the ability to deduct all allowable expenses (agent fees, management, repairs, mortgage interest, depreciation etc…)
2 -Flat 10% tax on the gross rental income
The landlord will pay income tax at a flat rate of 10%. This seems pretty good! However, on this route the tax is charged on the gross rental income and it is not possible claim any expenses.
So, for example, if the tenant pays a total rent of ILS 120,000 per year, the landlord will need to pay (120,000 * 10%) ILS 12,000 of income tax on this income.
To be eligible for the 10% tax route, the circumstances must be as follows:
– An “individual” landlord rents a residential property
– To a tenant who is an “individual”
– For the use of residential purposes.
3 -Tax exempt route on 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 ILS 5,471 per month as of 2023 (2022: ILS 5,196) 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 5,471 per month.
– If the landlord rents more than one apartment, provided that the total income from all apartments is less than NIS 5,471 per month.
What if the rental income is higher than the exempt amount?
If the amount of rental income is higher than NIS 5,196 but lower than NIS 10,392, a tax exemption will be granted for only part of the amount. However, for each shekel that the income exceeds the 5,196 threshold, the exemption is reduced by 1 shekel.
Monthly rental income of ILS 7,000:
First: calculate how much the income exceeds the ILS 5,471 threshold: (7,000 – 5,471 = 1,529).
Then: deduct that amount from 5,471 and you have your exempt amount: (5,471 – 1,529 = 3,942)
Exempt amount: ILS 3,942
Taxable amount: (7,000-3,942) ILS 3,058
So in this example, the monthly income of ILS 7,000 is split up and taxed as follows:
ILS 3,942 exempt
ILS 3,058 taxed at marginal rates
Pay low tax on rental income
It is recommended to seek professional advice to calculate the best tax route for you. Whilst, sometimes the 10% route may seem to be the lowest tax rate and the most straight forward, it is worthwhile to check what expenses are allowable (for example depreciation) and the impact this has on the overall rate of tax.
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