Taxation on a tenant
Rental income is taxable income. The law offers several taxation routes that the lessor can choose between.
Get to know them well and choose the most profitable route for you. This can help you save a lot of money in paying taxes.
When choosing a route, you should pay attention to the following – is the property used for residence, is the income in Israel or abroad, is the apartment registered in your name or in the company’s name, does dealing with the property amount to a business, what is the level of current expenses and what is the depreciation on the property.
It should be noted that the duties and reporting method to the income tax is different in each of the routes.
1-track with exemption
2-Simple route
3- Marginal tax route in Israel and the Gulf
4-A simple route abroad
1-track with exemption
Exempt route/ partial exemption of the route allows an exemption up to a ceiling that is updated once a year ~ NIS 5,030 per month. That is, if all the income of the taxpayer amounts to NIS 5,030 per month, rental income is exempt from tax!
If the rental income exceeds NIS 5,030, when the sum of all the rental income owned by the family (wife, husband and children under 18) whether the apartments are rented for residential purposes or for business purposes, then the exemption is reduced according to the following method – one must subtract from the exemption (~ 5000) Any income that exceeds the ceiling, so that as the rental income increases, the exemption amount is small, while all income above the adjusted exemption is subject to tax according to the lessor’s marginal tax rate, but not below 31%. If the landlord is over the age of 60, he can also benefit from lower marginal tax rates according to the level of income.
Not everyone pays for this route and not everyone is entitled to it.
Below are the conditions to enjoy the exemption route
The apartment is rented for residential purposes only, and the tenant has a statement to that effect
The apartment is in Israel or in the region
Single renter and the apartment is not registered in the business books and the income from the rent does not qualify as a business,
The lessor is an individual or a group of people appointed by a manager who rents out the apartment for residential purposes
Is it possible to recognize expenses?
Depreciation and maintenance expenses can be recognized for the purpose of generating rental income.
Who is it most profitable for?
If your property is in Israel and is used for living, all of your rental income amounts to NIS 5,000 per month or you are over 60 and have a low income so that you can also enjoy low marginal tax rates, both from exemption and from clearing expenses.
Highlights
Exemption is monthly and not annual, if an apartment is not rented for part of the year, then exemption is partially calculated for the time the apartment was rented. In order to calculate an adjusted ceiling, one must take into account all the income from all the assets that the family has, including those that are not for residence or not in Israel. If the monthly income from rent exceeds NIS 10,000, there is no point in calculating this route.
Reporting Obligations
In case you chose the route with “partial exemption” you must open a file to report all income including property rental.
2-Simple route
Payment of 10% tax on all rental income, from the first shekel to the last shekel.
You can choose a route under the following conditions:
If the apartment is rented for residential use, in Israel only.
If the rental income does not amount to a business.
Can expenses be recognized?
There are no exemptions or deductions for expenses and depreciation.
Who is it most profitable for?
If you own several apartments and your income is high, this route can benefit you because there are no restrictions regarding amounts and the number of apartments.
Reporting Obligations
In the 10% route, the lessor must pay tax within 30 days! From the end of the tax year in which the income was received.
If you have an income tax file, you can pay the tax online. If you do not have a portfolio, you must request vouchers from an assessor and pay through the vouchers. If your annual income from renting the apartments exceeds NIS 339,000 in 2019, you will be required to submit an annual report.
3- Marginal tax route in Israel and the Gulf
In the third track, the tax rate on rental income will be determined according to the individual’s income but at a minimum of 31%, except for people over 60 who are also allowed low marginal tax rates.
Can expenses be deducted?
In this route, it is possible to deduct current expenses that were in the production of income, offset losses and deduct increased depreciation.
In addition, in this route there is no restriction of use, ownership, or location (in Israel, or abroad).
Who is it worth?
If the property is in commercial use, or if your property is located abroad in a country where you pay taxes and has a tax treaty with Israel to prevent double taxation, because in this route, tax paid in a foreign country can be deducted from the tax you owe to Israel.
And if you had losses and expenses that you want to offset.
Reporting Obligations
Anyone who chose the third route must submit an annual report to the income tax.
4-A simple route abroad
This route is relevant to an Israeli resident who owns an apartment abroad and is not interested in route number three.
According to this route you can pay a tax of 15%.
Can expenses be deducted?
There is no right to deduct expenses and losses except for depreciation. Likewise, tax paid abroad cannot be offset.
Who is it worth?
For those with very high incomes who own several apartments in countries where there is no tax treaty with Israel, or taxes that are not high.
Reporting Obligations
If your assets exceed a ceiling of NIS 1,800,000, you must submit an annual report.
Regardless of the amount of income or the value of the assets, those who own assets abroad must be reported through the income declaration form 5329.
In conclusion:
The routes detailed on this page are not meant to teach you how to do the calculation on your own, but rather to give background and a general understanding of things. In order to perform a calculation of the taxable amount in routes where the deduction of expenses is allowed, it is recommended to use a professional.
In order to encourage professional and timely submission, the IRS has defined expenses involved in preparing tax reports as an expense allowed for deduction for both the self-employed and employees!
We have extensive experience in all employee taxation issues and will be happy to be at your service.
