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Long-term rental in Israel
Many people own one or more apartments for long-term rental in Israel.
Whether on short-term or long-term, rental income in Israel is taxable. At least in theory, because as we shall see, there are several ways of declaring property income in Israel.
These different declaration options are adapted to each situation.
It's very important to choose the declaration method that's right for each owner, and each type of property. The right choice will generally result in lower tax rates, or even total exemption.
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Here are three different ways of declaring property income in Israel:
1 - "Normal" taxation method.
The income generated by the rents will be added to the owner's other income, such as a salary.
As a result, the owner will pay taxes according to the tax brackets that apply to him or her.
In this case, he can deduct depreciation and current expenses related to the rented apartment from the rent: repairs, renovations, bank charges, lawyers' and estate agents' fees, etc.
2 - "10% linear tax rate" mode.
By choosing this system, the owner must pay 10% of the amount of rent received in Israel.
He will also have to pay 15% of rents received on foreign assets.
Under this system, no expenses can be deducted. Neither depreciation of the property, nor ongoing maintenance expenses.
3 - Total or partial tax exemption.
Up to a certain amount of rent, the owner will not have to pay taxes on the rents received.
This amount is reviewed annually. For fiscal year 2023, the amount is 5470 shekels per month (5196 Nis for 2022).
If the rent received exceeds this amount, the authorized exemption must be recalculated as follows: (An example is shown below).
The amount in excess of the amount is deducted from the authorized ceiling, to obtain the "adjusted ceiling". The "adjusted ceiling" is deducted from the rental income to obtain the "taxable income". The resulting taxable income is taxed in accordance with the owner's passive income tax brackets.
A small example in figures to illustrate the No 3 plan:
Mr A receives rent of 7,000 Shekels/month for a 3-room apartment in the center of Jerusalem.
For 2021, the adjusted ceiling will therefore be :
Impact on ceiling: 7,000 -5,470 = 1,530.
Adjusted ceiling: 5,470 -1,530= 3,940 Shekels.
The annual taxable income will therefore be : 7000 -3 940 = 3060 Shekels * 12 = 36 720 Shekels.
This amount will be taxed from 31%, with some exceptions. (see below).
Here are three different ways to declare a long-term rental in Israel:
The choice of tax mode often seems obvious in view of the amount of rent or the owner's income, but there are other points to consider in order to optimize the advantages of each mode.
Some of these points are listed below:
1 - Don't take the amount of rent alone into account when choosing your tax regime.
As mentioned above, up to a certain amount of rent, this income is not taxable. On the other hand, it is not possible to deduct expenses related to the rented apartment: depreciation, renovations, repairs, legal fees and others...
For some landlords, it may be preferable to opt for normal taxation, as they will be able to deduct expenses. This is the case even when the rental income is slightly higher than the exemption ceiling mentioned above.
2 - Think about resale too.
When you sell your apartment, you have to pay a capital gains tax called "mass shevah". This tax is linear, at a rate of 25%.
To calculate the realized capital gain, the tax authorities in Israel will deduct from the initial purchase value of the apartment the depreciation that could potentially have been deducted from the rents received. And this applies regardless of the system you choose to declare your property income in Israel.
This will "artificially" inflate the capital gain realized. As a result, the amount due to Mas Shevah will be inflated.
This very important factor, which can have a major impact on the amount of your capital gain, will be the subject of a separate article.
3 - We don't always have a choice.
In some cases, the owner does not have the right to choose how he or she wants to be taxed.
This is the case for owners of several rented apartments. There is no exact figure for the number of apartments rented out.
The usual position of the tax authorities is that if you rent 5 or more apartments, you don't have the option of paying the flat rate at 10%.
In fact, the tax authorities consider the rental income from all these apartments as "active" income.
In other words, these revenues are considered as if the owner had the commercial activity of renting apartments. The owner will therefore be automatically taxed under the "normal" system. He will not be able to opt for the 10% regime or the partial exemption.
6 things to know when renting your apartment.
The amount of the exemption on property income is updated each year and indexed to inflation.
Not declaring is only allowed in the full exemption regime. In the 2 other cases, you will have to declare whether or not tax is due.
If you rent out more than one apartment, the exemption limit is based on the total monthly rent for all your apartments.
It is possible to apply a different tax regime for each apartment, but also to change the regime each year for the same apartment.
The various tax regimes apply only to long-term residential rentals.
An apartment rented on a short-term basis (Airbnb, booking etc...) must be declared as a commercial rental.
4 - Each apartment can have a different plan.
If an owner has 2 or more apartments, which he rents out on a long-term basis, he can choose a different taxation method for each apartment.
However, we need to take into account all monthly rental income to establish whether one of the properties can be fully exempted.
For example :
A person with 2 apartments, one rented at 4000 Nis / month, and the second at 7000 Nis / month.
We take into account the total income generated by these 2 apartments (i.e. 11,000 Nis). As a result, we can't opt for partial exemption, even for the apartment rented at 4,000 Nis / month.
You will need to opt for either the 10% regime, the actual regime, or both.
Our firm specializes in this type of arrangement. Generally, we can save you several tens of thousands of Shekels/year, depending on the nature of your property and your personal status.
All you have to do is choose the right plan every year.
5 - Is Bitouah Leoumi paid on property income in Israel?
If the Bitouah Leumi decides that an owner who rents out his apartments belongs to the "commercial" category, he will have to pay bitouah leoumi and mass briout.
However, even in this case, there is a way to convince the Bitouah Léoumi not to claim these contributions. This will involve negotiation and other factors. (Length of lease, frequency, financing of goods, etc.).
6 - Is VAT paid on property income in Israel?
The rental of residential apartments is exempt from VAT in Israel. Therefore, as long as the apartment is rented for residential purposes, there is no no VAT payable. (Article 31 (4) of Israel's VAT law).
The real question arises when the apartment is rented on a short-term basis. On sites like AirBnb, Booking and other short-term rental platforms.
In such cases, it is highly likely that the VAT office will reclaim the VAT collected on these stays.
Conclusion: Don't opt for the 10% diet just yet.
As you can see, property income in Israel is a tricky subject that requires a great deal of know-how.
If you own one or more apartments for long-term rental, don't run to the 10% scheme just yet.
It's often best to carry out an optimization study. This can save you several thousand Shekels a year.
We can help you optimize your property income in Israel.
