Taxes on Rental Income
My client recently purchased a delightful apartment in Jerusalem to rent out and generate an income stream. At contract signing, he asked us to explain his income tax obligations. At that moment I realized that I should dedicate an article to this topic, as the issue of Israeli tax obligations on rental income applies to many people. (For guidance regarding overseas tax obligations on Israeli income, please speak with your local tax lawyer or accountant.)
Note: Don’t get scared off by the numbers. I tried to keep the examples simple. Read the article slowly and you will get it! Here we go. . .
Let’s say Rafi owns an apartment that he rented out to a tenant – we’ll call her Elana – for residential use. If Elana’s total monthly rent is 4,980 NIS (the “exemption ceiling”) or less, Rafi will be exempt from paying Israeli taxes.
However, once the rent rises above the 4,980 NIS exemption ceiling, the exemption decreases on a shekel-for-shekel basis. For example, if Elana’s rent increases by 500 NIS to 5,480 NIS, the 500 shekels above the 4,980 shekel exemption ceiling will be subtracted from 4,980, and Rafi will be left with an exemption on the first 4,480 NIS of rent. The remaining 1,000 NIS of rent will be taxed.
What’s the tax rate?
The tax rate generally starts at 30% and offers the exemption discussed above, plus deductions for related expenses such as legal fees, repairs and depreciation. Alternatively, one can choose an easier – and sometimes less expensive – option and pay a 10% “flat rate” tax on the rental income. “Flat rate” means that the tax is fixed at 10% and one may not deduct any expenses or receive the above-mentioned tax exemption.
Let’s now compare the two options to determine which tax rate is more favorable for our friend Rafi. In the example where Rafi receives rental income of 5,480 NIS, assuming his tax bracket is 30%, Rafi would pay 30% tax on the 1,000 NIS of taxable income above the 4,480 NIS exemption, or 300 NIS per month. However, if Rafi chose the 10% flat tax rate, he would pay 548 NIS in taxes. In this situation, Rafi would be smart to choose the 30% tax rate, which would allow him to take advantage of the significant tax exemption, and pay only 300 shekels in taxes.
As rents increase, the tax exemption decreases and the 10% flat tax becomes more appealing. For instance, if Elana’s monthly rent rose to 6,480 NIS, the tax exemption would decrease to 3,480 NIS (4,980 minus 1,500), and the 30% tax bill on the 3,000 shekels of taxable income would be 900 shekels. In comparison, the 10% flat rate tax on 6,480 NIS would be a more favorable 648 NIS.
As you can see, it is imperative to crunch the numbers in order to determine which tax option will save you more money.
Contact a Pro!
This article was created as a general overview and is far from an exhaustive study. Before taking action, please speak to a good lawyer or accountant who knows all of the nuances of these tax laws and will protect your interests.
I would like to thank my friend and accountant David Rosenbaum for reviewing this article and clarifying many important points. David is licensed in Israel and the US – and is quite excellent. If you have any questions, feel free to contact him at firstname.lastname@example.org.
Gedaliah Borvick is the founder of My Israel Home (www.myisraelhome.com), a real estate agency focused on helping people from abroad buy and sell homes in Israel. To sign up for his monthly market updates, contact him at email@example.com.