Israel Tax Options – everything you need to know about income from residential rent
According to Israel’s Income Tax Ordinance, taxpayers receiving income from residential property are eligible to choose the tax option that best meets their needs. Subject to their choice they will calculate, file reports, and pay tax on their income from rent:
1. Tax exemption – according to the Income Tax Ordinance (Tax Exemption on Income from Residential Property); provided that the total income from rent, month after month, does not exceed 5,030 ILS per month (for 2018), an owner of residential property may be exempted from income tax on the income received from rent. If income from rent exceeds the aforesaid ceiling amount, taxpayers should check which tax option serves them best.
Choosing the tax-exempt option, an individual cannot claim expenses regardless of how many properties he or she rents out. The only parameter that counts is the total income produced from the rent.
An important notice: to be eligible for the tax exemption option the property must be rented to an individual, or under certain conditions to a non-profit organization. If a rental contract involves a company and even if on behalf of the company an individual occupies the property, exemption does not apply.
Partial exemption – if the amount received from residential rent exceeds 5,030 ILS per month, but does not exceed double this amount (10,060 ILS per month), taxpayers are eligible for partial exemption. For example: if the income from rent is 5,500 ILS per month, the amount that exceeds the ceiling amount is 470 ILS. Hence, on double the amount exceeding the ceiling amount (940 ILS), taxpayers will pay 31% marginal tax (the first tax bracket for this tax option). In this case and against the taxable amount, taxpayers can deduct expenses related to the income such as mortgage interest, depreciation, maintenance, and so forth. Note that expenses for deduction purposes are subject to the ratio between the taxable income and the total income from rent.
When exemption is not eligible – if the monthly income from rent exceeds double the ceiling amount (10,060 ILS) exemption from income tax does not apply, and the entire income from rent will be taxed according to the options mentioned below.
2. 10% flat tax – according to this option (Income Tax Ordinance, section 122 (a)), the entire income from residential rent received by an individual is subject to 10% tax. Choosing this option, taxpayers are not eligible to deduct any expenses.
This option is applicable as long as property is rented for residential purposes, regardless of how many properties and who are the tenants. Never the less, kindly note New judgment (LESHEM AND BIRAN) in which it was determined that the rental of a large number of apartments may be considered as income from business. According to the income tax approach, rent of more than 10 properties will most likely be considered as business activity.
According to the tax authorities, taxpayers who did not pay their taxes until January 31 of the following year, in which income from rent had been received, this option will not apply. However, this approach is no longer enforced, and late payments are subject to interest and linkage to the tax owed. To avoid dispute with the tax authorities, we strongly recommend taxpayers stick to authorities’ deadlines.
3. Tax brackets option – filing a profit loss statement – expenses related to a property (depreciation; according to Israel depreciation regulations, finance expenses, management fees, maintenance, etc.) are deducted from the income received from rent, and taxes are paid on the profit the rent had produced. Eventually, taxpayers will pay taxes depending on their tax bracket that is subject to their overall income. In any case, and since income from rent is not considered earned income, the first tax bracket is 31%.
A. Income from rent received by individuals age 60 and over is taxed according to the earned income tax brackets – 10% for this age group.
B. Income from residential rent in Israel is exempt from Bituach Leumi (national insurance; health levy and social security) regardless of the tax option chosen, provided the property is rented to an individual and income from residential rent is not business income (National Insurance Circular 1368 (General Circular 52/08)).
C. Income from residential rent is VAT-exempt.
D. Taxpayers should choose their tax option depending on their monthly income from rent, the number of properties they own, age, tax credits, as well as other sources of income and earnings including business earnings and salaries.
E. It is possible to combine tax calculation options – between the flat 10% option and tax brackets options, and under certain conditions it is also possible to combine the tax exemption option with other options as well. Providing that the income from residential rent does not exceed the ceiling amount for exemption.
F. In the exempt and flat 10% options, if a taxpayer sells a residential property that produces profit which is subject to land betterment tax, the depreciation that was not claimed will be deducted from the acquisition value. If a taxpayer has chosen the tax bracket option, depreciation is inherently deducted.
G. Taxpayers that have chosen the tax brackets option, the partial exemption option, or, if they have chosen the flat 10% option but their income from residential rent exceeds 334,000 ILS (for 2017) they must file an income tax statement.
If you own residential property in Israel that produces income from rent, we are happy to recommend the best tax option for you.
We are looking forward to hearing from you.