Lessor, Lessee and not Necessarily Paying Tax in Lack of Profits
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Lessor, Lessee and not Necessarily Paying Tax in Lack of Profits

January 29, 2024
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Sometimes it is older people who seeks to move into sheltered housing and sometimes it may actually be a young couple who, with the expansion of the family, are looking for a bigger house. Either way, many people prefer not to sell the property and instead prefer to rent out the existing property while simultaneously renting another property for themselves.

While rent income is supposed to be taxed pursuant to the total income of the taxpayer, with a private person also not able recognize expenses, the Israeli Income Tax Law (Exemption from tax on income from rent for residential apartments), 1990, sets a number of cumulative conditions for an exemption from tax on income from rent of a residential apartment in Israel, including the fact that the apartment is for residential purposes only and is rented to an individual (other than a few exceptions set by law) and not for business purposes.

The rent would be completely exempt from tax, as long as the rental amount does not exceed the cap set by law (in 2024, the cap is ILS 5,654). If the rental amount is higher than the exemption cap but does not exceed double the cap, a partial tax is paid (in which case the lower tax rate is set at 31%, except for those over 60, in which case the first tax level is 10%).

Section 122 of the Income Tax Ordinance allows individuals to pay within 30 days of the end of the tax year a reduced tax of 10% on the full rental income and without allowing recognition of expenses. However, a very important 2023 amendment to the Income Tax Ordinance allows, under certain conditions, owners of a single apartment to recognize as an expense (and thus pay a 10% tax only on the difference) expenses on rent elsewhere up to a total of ILS 90,000 annual expense (ILS 7,500 per month, when it comes to renting for a whole year). Thus, the legislator has now allowed people to rent their apartment and rent an apartment elsewhere in Israel (including when it comes to renting a housing unit in a nursing home or a geriatric hospital.) Thus, for example, a person who owns an apartment that is rented out for ILS 9,000 a month and he rents another apartment for a higher amount, has an annual income of ILS 108,000 (9,000 times 12), and expenses of ILS 90,000 (because not all of the new rental expenses are recognized) and therefore will pay ILS 1,800 in tax (10% of the difference of ILS 18,000), while before the amendment he would have paid ILS 10,800 in tax (10% on the full amount).

It is important to note that the above is a very general overview (the rules are much more complex and also deal with cases of owning more than one apartment, of course) and the tax liability must be examined through an accountant with experience in the field. It is also important to note that the tax must be paid immediately and no later than the end of January, but in some cases it is possible to pay late subject to the payment of linkage and a fine. In any case, when it comes to renting an apartment by such who seeks to better their housing (renting out one apartment and renting another), it is also important that the rental agreements are drafted correctly and not to use a template that one may find on the Internet, but to use a lawyer with expertise in the field and an understanding of tax laws.