Tax on Rental Income in Israel
There is no doubt that one of the major factors driving up Israeli house prices in recent years has been the large volume of real estate purchases by investors - both local and foreign.
With the vast majority of these properties being rented out, we thought it would be helpful to take a brief look at the Israeli tax regime on rental income.
Before beginning it is important to note that the information below pertains to residential and not commercial real estate. Residential real estate that is being used for commercial purposes falls in to the latter category (hence the reason for the clause in most rental contracts that the property is "not to be used for commercial purposes").
Furthermore, as with all things 'tax', one should always consult with a qualified tax adviser before taking any action, and this is particularly true of the subject at hand, which can get a little complex, and may need to be accompanied by the opening of a tax file with the Israeli tax authority.
1. Reduced Rate
Under this option, a flat tax rate of 10% per annum is applied from the first Shekel of the rental income. It is not possible (as in option 2 and 3 below) to offset expenses incurred such as lawyer’s fees for preparing the rental contract, repairs to the property during the tax year, or an annual depreciation charge of 2% of the purchase cost of the property.
Note that 10% is the tax that is payable under Israeli tax rules, however if you are subject to tax in other jurisdictions you may have to pay more tax on the rent in your home country.
2. Marginal Rate
Here, tax is payable at your marginal tax rate. It is important to note that as opposed to regular income, the lowest marginal rate for rental income is 31%. There is an exception for homeowners that are aged 60 or over during the relevant tax year, whose marginal rate starts at 10%.
Furthermore, under this option, you can deduct the above-mentioned related expenses from your income before paying the tax.
3. Full/Partial Exemption
Full exemption is the one that most are familiar with. It stipulates that if the monthly rent is less than 5,070 Shekel (as of 2016) then there is no tax to pay on the rent (in Israel of course).
Partial exemption, which uses a three-staged calculation to work out the taxable amount, is where it gets a little more complicated. You can use the partial exemption method so long as the monthly rental amount is above the exemption limit (5,070 ILS) and less than double the exemption limit (10,140 ILS). For those of mathematical persuasion we bring an example calculation below. (For the rest of us, look away now and let the accountant deal with it!)
The taxed amount of 2,000 Shekel is taxed at your marginal tax rate (which, as above, has a lower band of 31%, except for someone aged 60 or more, whose lower band is 10%).
With this method too, you can offset any property/rent related expenses against the taxed Amount, however only in proportion to the taxed amount as a percentage of the rental income (so in the above example: 2,000 / 6,070 = 32.9% - so one can deduct only 32.9% of the expenses).
It should be noted that options 1-3 above are property-specific, meaning that if you own several properties you can apply different options to different properties. We strongly encourage our clients to get advice from a tax adviser as to the most appropriate option for them. (Tip – in some cases the ability to offset expenses and depreciation can greatly reduce, if not totally remove, the tax liability.)
There are various other nuances involved with the above methods, for example whether it is necessary to submit an Israeli tax return, or when does the tax need to be paid, however to keep things (relatively) simple, we will not go in to them here, as each case needs to be looked at individually.
Please contact us here for any Israeli property-related queries you may have.