Israeli bill targets rental income tax exemption

An Israeli bill meant to prevent tax avoidance and increase the government’s coffers passed its first of three readings in the Knesset earlier this month. If passed, Amendment No. 268 to the Income Tax Ordinance will abolish automatic tax exemptions for residential rental income and set a standing ceiling above which taxes must be paid on rental income, rather than linking that ceiling to the consumer price index (CPI) as is done now.

Residential property owners currently receive an automatic tax exemption on up to NIS 5,470 ($1,477) of rental income each month. Property owners don’t need to apply for the exemption—they’re simply allowed not to report any income under that ceiling, which is indexed to the CPI, a measure of inflation and average consumer spending. Proponents of the new law say that under the current system, landlords can avoid reporting any rental income until they are caught in an audit, and when audited, they can underreport.

Boruch Levenson, a tax consultant and partner at the Dray & Dray Israeli accounting firm, told The Media Line that the law is meant to increase tax compliance. “The basic concept behind [the law] is to require every landlord to report their rental income,” he said. “This will remove the landlords’ ability to say—should they be caught by the tax office after 10 years, or four or five years of not reporting their income—'Oh, I was receiving only NIS 5,000 [$1,350] per month, and therefore it wasn't reportable.’”

“The tax offices are obviously looking at a more aggressive approach toward the landlords and tax avoidance in the field of rental income,” Levenson said. “And this change in law is a bit of a wake-up call to remind people that they're better off going to the tax office than waiting for the tax office to come to them.”

He explained that under the new law, the Israel Tax Authority will be equipped to examine tax and income data to see exactly who owns apartments, who is registered as living in these properties, and the reported costs associated with them. Then, the authority can go after landlords who are not paying the required taxes.

The new law also seems to be part of a strategy to address the Israeli housing market, which, according to economic experts, shows signs of becoming a bubble. The removal of the indexed tax exemption ceiling—in other words, setting a permanent ceiling of NIS 5,470 shekels ($1477) as the monthly rental income above which tax must be paid, regardless of future inflation—would slowly result in the tax exemption becoming less appealing.

The bill’s explanation states that the current rental tax exemption “creates excess demand for the purchase of apartments for investment, due to the differences in taxation compared to other investment routes where the return is subject to full tax.” Disconnecting the tax exemption ceiling from the CPI is described as a slow route to addressing “the problematic consequences of the aforementioned tax exemption.”

Will the new bill raise rental costs in Israel?

Not everyone is on board with the proposal. Lawmaker Ze’ev Elkin of the National Unity Party opposes the bill on the grounds that it would harm lower-income Israelis by resulting in higher rent. “The law will raise the index and rent prices in Israel. The citizens will pay hundreds of shekels more every month for housing,” he said. 

Coalition lawmaker Yinon Azoulai of the Shas Party expressed similar opposition to the bill but said that he “will vote alongside the coalition” regardless.

“The problem with this law is the fixing of the [tax exemption ceiling],” Azoulai said. “We will try to change this law in the finance committee so that it does as little harm as possible and provides as much benefit as possible to the people of Israel.”

According to Levenson, the bill should not result in landlords having to raise rents. “The change in and of itself shouldn’t have any implication on rental costs,” he said.

Real estate broker Dalia Katziri of the Home in Israel real estate group told The Media Line that the law may result in higher rents. “It sounds like a good law,” she said, noting that it will likely increase tax compliance. At the same time, she said, “it’s very reasonable to assume the rents will rise, either because of [landlords being forced to pay taxes] or simply because of sudden changes to supply and demand in the market.”

For now, the bill has been sent to committee for discussion and amendment before its second and third plenum readings to become law.