Much has been said in recent years about apartment prices soaring sky high and that young couples cannot afford to buy their first home.
At the same time as the rise in apartment prices, the alternative available to young couples and those seeking to buy a bigger home has been to rent an apartment instead of purchasing ownership of a home. This has resulted in excess demand for apartment rentals and high prices in the rental market too, and the entry of Israeli and foreign investors looking to buy an apartment for investment.
Alongside the rise in rental prices, the tax authorities understood the potential and the amount of tax that could be collected through an income tax order for these incomes, and major efforts have been made recently to collect tax by law from this revenue. In the case of income from residential rentals in Israel by individuals that does not represent the revenue of a business, the tax liability for income is according to four options, as follows: The first option: revenue from rent will be exempt from tax as long as they are lower than the exemption ceiling. As of 2014, the exemption ceiling stood at NIS 5,080 per month.
For this option there is a second alternative under which the exemption ceiling can be reduced by an amount that is double the sum above the exemption ceiling (in other words: "The adjusted exemption ceiling"). For example, if the rental income is NIS 5,200 per month, NIS 120 above the exemption ceiling, then the exemption ceiling will be reduced by NIS 240 and marginal tax on NIS 240 will be paid while NIS 4,960 will be exempt. As the monthly income from rent rises above the adjusted exemption ceiling, it is possible to choose between the following options.
The second option: a marginal tax payment in which the lowest tax rated is 30% of the profit accrued (a person older than 60 can take advantage, depending on the amount of income, on a tax rated lower than 30%). According to this option, it is possible to recognize the depreciation in expenses of the apartment minus the land and all the expenses that can be related to the income from the rent.
The third option: A tax payment of 105 of the total net income without offsetting it against overall expenses.
We should clarify that the aforementioned option described for income from residential apartment rental is only in Israel. Regarding income from renting apartments overseas there are other mechanisms for the tax payments.
When examining all the tax alternatives previously detailed, it can be seen that the legislator and the tax authorities apparently forgot a very large population and does not hear them crying out. Who is this population? Moving to a better home by renting.
Those families with two or three children, for the most part we are talking about middle class families, which own one apartment and rent another apartment with a small number of rooms that was bought at the start of their married life. And today they cannot afford to upgrade their apartment and buy a new and larger home.
Due to the rise in home prices, the only alternative that they currently have is to rent out the apartment that they own and then rent another apartment that can sustain their growing family.
However, according to the current laws, they are required to pay tax on the apartment that they own, without any opportunity to offset their income against their rental expenses when in most cases the amounts received from their apartment is lower than their expenses.
For example: a family that owns a three room apartment rents it out for NIS 6,000 per month, while paying NIS 7,500 for a rented apartment. The additional cost for them after tax under the third alternative would be NIS 600, while from a financial point of view because it is not possible to offset this against the rent they receiving and paying there is an overall loss. The solution to this is very simple. An amendment to the income tax order will allow only Israeli residents that own only one apartment, which is rented for residential purposes, to offset the rent they pay against the rental income from their apartment.
In such a situation, the tax authorities would collect the real tax from those renters only in cases where the income is larger than the rental expense, and this will allow many families to improve their homes without being concerned about evading taxes, and they will collect the full tax from the rent of those investors that have rally purchased apartments for investment aims and to earn money from it.
This is one more point to be considered by all those Ministry of Finance and Ministry of Housing committees looking to make life easier for those seeking a bigger home.
The author is a Manager at UHY Shtainmetz Aminoach & Co., CPA