The Israel Tax Authority has recently been working vigorously to change the rules of the game in the rental sector through major legislative amendments. Until now, tax on returns from apartments has been prioritized over tax on returns from other assets.
Now, it seems that the Tax Authority has understood the distortion that was created and is working to correct it. Today, an individual's income from renting an apartment in Israel is handled for tax purposes in one of three ways:
The exemption track under which the landlord is entitled to receive a tax exemption on rent income up to NIS 5,471 per month as of 2023. The rental income beyond the ceiling is taxed according to the individual tax rates. The ceiling is linked to the consumer price index and erodes the higher the rental income. Those whose income from rent is less than the ceiling are not required to report it at all (except for those who are required to submit a report for other reasons).
10% track allows individuals to pay tax on their gross rental income at a final rate of 10%, without the right to deduct the expenses incurred. When calculating the appreciation tax when selling the apartment, the maximum amount of the depreciation will be added to the sale value.
Marginal tax track involves payment of tax according to the individual's marginal tax rates. When a taxpayer chooses this track, they will be entitled to deduct the expenses incurred in producing their income from the rent, including depreciation. This track is no different from the taxation method applicable to other income produced.
We will review the expected changes:
1. The first amendment has already been enacted, as part of the most recent Economics Arrangement Law, by providing a deduction for rent paid for renting another apartment. In other words, an individual who rents out his only apartment, who chose to pay the tax for the rent at the 10% rate, may deduct from his income the amount of the rent he pays as a tenant, up to the amount of his income from rent that year, or up to NIS 90,000 per year, whichever is lower, provided that the payment they made is not required as a deduction in the calculation of the individual's taxable income.
An interesting point in this amendment is that, for the first time, the Tax Authority is required to allow deductions of private expenses (significant, it should be noted) in the calculation of taxable income.
2. As part of the recently published bill, it was proposed to cancel the exemption from reporting rental income. That is, even those whose income from renting a apartment does not exceed the ceiling, would be required to submit an annual report, unless they have submitted an online statement, which details the rented apartments and the amount of rental income. The proposed reporting obligation will make it difficult to continue tax evasion, assuming that taxpayers will avoid submitting a false declaration.
3. It is proposed to abolish the mechanism of linking the ceiling to the consumer price index, and to set it at NIS 5,470 and thus slowly erode the exemption track. Regarding this proposal, it is written in the explanatory notes to the proposal that the exemption has a high fiscal cost and regressive results that benefit taxpayers with multiple assets. Beyond that, granting the exemption generates excess demand for the purchase of apartments for investment, due to the differences in tax payment compared with other investment tracks.
The amendments are intended to restore the balance between the various investment options and cancel the tax preference that prevailed in the past in relation to rental income.
The authors are partners at the Meir Mizrahi and A. Rafael law firms.
Published by Globes, Israel business news - en.globes.co.il - on July 12, 2023.
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