Tax Authority struggling to combat rental fraud

Homes for rent  credit: Eyal Izhar
Homes for rent credit: Eyal Izhar

In the absence of adequate records, tax evasion in Israel's residential rentals market is rife.

Home prices in Israel are rising fast, and the shock waves are being felt in the rental market. Landlords are demanding higher rents, and tenants are sometimes having to pay hundreds, and even thousands, of shekels more to stay in the same home. Landlords, however, sometimes hit an obstacle, namely liability to tax when monthly rental income exceeds a certain amount. For 2022, the amount is NIS 5,196.

That, however, doesn’t necessarily stop them, and some find creative, even illegal, ways of circumventing the obstacle: secret annexes to the contract; collecting part of the rent in cash; renting out the parking space separately; and even "agent’s fees" paid to the landlord. And that is only a partial list.

"A month ago, the landlord requested me to make out the checks I give to him for NIS 5,100 a month, even though the rent that I pay is higher, saying ‘We’ll find a way of transferring the rest.’ It took me a while to realize that he wanted to avoid tax. At the same time, he also raised the rent, but that’s another matter," a tenant from central Israel told us.

A person looking for an apartment in the center of the country wrote in a post on Facebook that the landlord asked for rent of NIS 5,200 monthly, and another NIS 5,000 agent’s fee payable to himself, even though he had not shown her the apartment. Someone renting out an apartment in central Israel told "Globes": "We rent out an apartment. At the beginning, we agreed with the tenants on a rent of NIS 5,700, but then they started to ask for all kinds of repairs and changes, so we suggested that the rent should be reduced to NIS 5,150, but that the repairs would be at the their cost. That way, we relieved ourselves of having to deal with it, and they won a discount. Meanwhile, we have left the rent as it is, because what should I raise it for? In any case, it all goes to income tax."

Splitting the amount, market sources say, is a well-known practice: on the contract, the landlord takes the minimum, and the rest is accounted for as payments to the house committee, or expenses, or payment for furniture, or a realtor’s fee, or is simply taken in cash.

"There’s a lot of room for manipulation on rents," says Adv. Reut Felder, a lawyer with an office in Rehovot. "All kinds of additional obligations can be introduced in the appendix to the rental agreement, which isn’t reported to anyone. For example, separate rental of the parking space or storage space."

In the absence of a national registry of rentals, the Israel Tax Authority has a hard time enforcing tax laws on landlords who evade tax or find various ways of avoiding it. According to Tax Authority figures, at the end of 2021, there were over 340,000 people in Israel who owned more than one home. How many of them rent out the additional properties? No-one knows. Nor is it known how many of them pay tax on the income.

"People aren’t afraid, because they don’t know many people who have been caught," says Fedler. "We just hear about those who have made money, and not about the case of the individual who was caught. This is despite the fact that failure to report is a criminal offence carrying a penalty of up to two years in prison, a fine, or both. In more severe cases, the penalty can be up to seven years in prison."

Sometimes, she says, it’s preferable to report rental income just from an economic point of view. "Whoever doesn’t pay tax harms himself when it comes to capital gains tax when the property is sold. Many people are unaware of this. And capital gains tax is much higher than the rate of tax on rents."

The Israel Tax Authority told "Globes": "As part of the general treatment of tax evasion, in recent years the Tax Authority has bolstered enforcement of taxation on rents. Various actions have been taken, such as audits of landlords, the conduct of hundreds of criminal investigations, and, as part of the continuing process of expanding the reporting network, through cross-checking of information, thousands of files have been opened for owners of rental properties, from whom tax amounting to some NIS 1.4 billion has been collected so far."

NIS 1.4 billion, however, is a drop in the ocean of the sophisticated schemes for avoiding tax on rents.

A Tax Authority source told "Globes": "Without a reporting requirement on home rentals, the Authority has to work very hard to catch tax evaders in the market. We are constantly checking real estate records and databases on home ownership, but without a database of people renting out homes we can’t reach everybody."

The Israel Tax Authority and the Ministry of Finance tried to resolve the anomalies in the home rental market in the last Economic Arrangements Bill, and ought to enact a section that would obliged property investors to report rents received. The initiative was torpedoed, however, by Minister of Justice Gideon Sa’ar, who thought that a reporting requirement would deter people from renting out homes because of the burden of reporting, and that the stock of rental properties would reduce, and by Minister of Construction and Housing Ze’ev Elkin and officials in his ministry, who thought that the new reporting requirement would damage the rental market by leading to a rise in prices.

Rent taxation tracks:

1. A full exemption for rents that do not exceed NIS 5,196 monthly in total.

2. A 10% tax on rents above the exemption, with no deductible expenses.

3. Taxation at the individual’s marginal rate of income tax. Rental income is taxed as part of the taxpayer’s aggregate income, but he or she can deduct expenses such as legal fees, repairs, and so forth. The cost of the property can also be amortized, at 2% annually.

Note that this is a simplification of the tax rules, which should be consulted in detail as they apply to each individual's situation.

Published by Globes, Israel business news - - on June 19, 2022.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2022.

Homes for rent  credit: Eyal Izhar
Homes for rent credit: Eyal Izhar
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