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A draft bill has been published relating to the income tax due if you rent out a home in Israel [Income Tax Ordinance Amendment (Number 158), 2007 Bill]. This updates on our article in The Jerusalem Post on March 21, 2007 "Your Taxes: Investing in Israeli property."
Currently, residential rental income of up to NIS 4,200 per month is exempt from income tax. The rental lease must stipulate that the home is for residential use only.
If the rental income exceeds the above amount, two alternatives exist:
* Reduce the exempt amount by the excess on a shekel-for-shekel basis. The resulting taxable rent will be taxed at regular passive income tax rates of between 30 to 48 percent (plus National Insurance where applicable) after deducting permissible expenses.
* Elect to pay within 30 days a flat 10% tax rate of the gross rental income without any deductions, exemptions or credits. This means that mortgage interest, maintenance expenses and depreciation are not deductible if you elect the 10% tax option.
In past years the exempt amount (NIS 4,200) was almost double and many landlords were unaware of the new lower exempt amount. Therefore, they missed out on the "opportunity" to pay 10% tax within 30 days after receiving the rent. The draft bill proposes to let these landlords pay the 10% tax plus interest within 30 days after the amendment becomes effective. That date will only be known if and when the draft bill is enacted.
As always, consult experienced tax and legal advisers in each country at an early stage in specific cases.
Leon Harris is an International Tax Partner at Ernst & Young Israel