Israel Tax Authority targets owners of 2 homes

Moshe Asher Photo: Eyal Yizhar

Letters will be sent to people whose rental income is likely to exceed the NIS 5,000 exemption.

Sources inform "Globes" that the Israel Tax Authority is planning to send 20,000 letters to owners of two housing units whom it suspects of not reporting their rental income.

The Tax Authority has sent many letters to owners of housing units in Israel seeking to discover whether they are evading taxes on rent from the housing units. Up until now, however, letters have been sent only to owners of three or more units. The reason is that owners of three or more housing units are much more likely to be real estate investors concealing income from rent than owners of two housing units. The Tax Authority therefore first sought to go after the "bigger" investors in the housing market.

Up until now, in the framework of its effort to increase the numbers of those reporting to the Tax Authority, 142,000 letters were sent to people with suspicious indications that they were concealing income from the Tax Authority. 43,000 of these letters were to owners of three or more housing units reporting no income from rent. Most of these 142,000 queries were answered, and 45,000 new files were started for new taxpayers who were previously unknown to the tax system. These taxpayers poured a total of NIS 1.4 billion in to the treasury. Owners of three or more housing units who had concealed income accounted for NIS 495 million of this sum.

Now, while the mapping of owners of three or more housing units is still going in full force, and many investors have started reporting their income and paying taxes on it, the Tax Authority has decided to widen its net by starting to track owners of two housing units. The Tax Authority is currently cross-referencing data from the database of those paying betterment taxes with data from the Land Registry database, on which it is basing the database of owners of two housing units that it is compiling. The Tax Authority's goal is to clarify whether the second housing units have been leased, and if so, whether the income from them is taxable.

This batch of letters is likely to be sent to owners of a second housing unit in high-demand areas, mainly in central Israel, where the rent on a second housing unit, if it is rented, is likely to exceed that legally tax exempt ceiling.

The law in Israel stipulates that leasing a housing unit is taxed according to a number of attractive taxation alternatives, including an exemption for rent up to NIS 5,000 a month, payment of final tax at a reduced rate of 10% of the rent (if the tax is higher than NIS 5,000, the tax is paid on the entire rent), and a marginal tax rate according to the tax rates of a housing owner filing an annual tax return. If the monthly tax rental income exceeds NIS 5,000, then in addition to paying tax, the housing owner is also obligated to file annual tax returns and reports on rental income.

Lessors have a number of tax tracks at their disposal. The first includes filing reports and reporting net income, after expenses and depreciation are deducted. In this case, the tax applied is a marginal tax rate on all of the taxpayer's taxable income. The second and simpler track is paying 10% of the rental income with no deductions.

"Public panic"

The legislation on the subject is clear, but not all the owners of housing units have reported their income to the Tax Authority, and the state treasury has lost a lot of money as a result. The problem in the real estate market is that the state has no reliable source of information about the rental market in Israel, and the Tax Authority has found it difficult to determine how much tax is owed by lessors of housing units, how many lessors of housing units there are in Israel, and how many of them are paying the required tax. Concealing income in the rental housing market has therefore become fairly easy.

A survey of the residential real estate market conducted by the Ministry of Finance chief economist for the fourth quarter of 2016 found a low proportion of those reporting rental income by people owning multiple housing units. The proportion of tax evasion varied from nearly half of those leasing housing units in Tel Aviv to 75% of those leasing housing units in Rehovot and the Shfela region. The Tax Authority has accordingly made combating tax evasion in this market a high priority.

In the case of owners of two housing units, tax expert Advocate and CPA Noam Sharabi believes that the state will not derive much revenue from the measure. "Given the existing tax exemption on income up to NIS 5,010, most owners of housing units will owe no tax in any case. Such an all-inclusive step by the Tax Authority will create too heavy a burden for both hundreds of thousands of people and income tax workers, who will have to process all the queries received… The Tax Authority would do well to utilize the vast amount of information at its disposal about the location and size of the housing units, additional income of the owners, the proportion of their ownership, and so on, so that demands can be focused, not sent out indiscriminately in a way that will sow panic among the public." As noted, the Tax Authority is planning to concentrate its letters in areas where rents are high.

The Tax Authority said in response, "As part of the Tax Authority's policy of inducing more taxpayers to report their income in order to make the tax burden more equal, it has instituted a letter campaign in the past two years. This campaign is designed to utilize computer cross-referencing to detect people conducting unreported business activity. This measure has been successful, with tens of thousands of taxpayers being added to the rolls and paying tax according to law. The Tax Authority plans to continue this measure, while continually expanding the criteria for its probe."

Published by Globes [online], Israel Business News - - on September 6, 2017

© Copyright of Globes Publisher Itonut (1983) Ltd. 2017

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Moshe Asher Photo: Eyal Yizhar
Moshe Asher Photo: Eyal Yizhar
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