Your Taxes: Tax Authority homes in on tax evaders who own short-term rentals

The ITA says it carried out an operation involving 58 audits in Tel Aviv, Jerusalem, Haifa and Eilat and found that 33 percent of home owners did not report their income.

Shekel money bills (photo credit: REUTERS)
Shekel money bills
(photo credit: REUTERS)
The Israel Tax Authority (ITA) announced on June 28 that it is targeting tax evaders who rent out their homes on a short-term basis via websites such as Airbnb.
This comes just as Airbnb is reported to be lining up investors for a new funding round that would value the company at around $30 billion prior to a possible future initial public offering.
The ITA says it carried out an operation involving 58 audits in Tel Aviv, Jerusalem, Haifa and Eilat and found that 33 percent of home owners did not report their income. The operation was preceded by preparations that involved placing an online order and locating the home owners. The ITA says more of these audits are planned in the near future in the short-term home-rental sector.
In Tel Aviv, six home owners who were located via the Airbnb and Booking websites rented out their homes but did not report their income to the ITA. One home owner failed to report as much as NIS 135,000 (about $35,000).
When asked about it, he replied: “I report according to 10% [optional flat rate for passive income]. I didn’t know it is business income.” In another case, income of NIS 25,000 (about $6,500) was not reported, and no books were kept.
In Jerusalem, the ITA found four home owners who rented their home on a short-term basis via Airbnb and failed to report their income. One of them who failed to report income of NIS 144,000 said: “I meant to open a tax file and report.”
In Haifa, five home owners who did not report their income were spotted. They mainly said they did not know they had to report.
In Eilat, one home owner had two villas and was making NIS 1,000 to NIS 3,000 per day, but he had no tax file.
When asked about it, he said: “I’m ill. I don’t have any strength.”
The ITA warns us that each of these cases is now under investigation.
Some comments This ITA press release raises several tough issues.
First, it is far from clear whether all these home owners were conducting a business that necessitated immediate tax registration and bookkeeping. Many people rent out homes or rooms for varying periods; this is usually accepted as being passive and not active in nature. If so, the 10% flat-rate tax option is one of several options, and the tax is reported and paid after the end of the year, not in June.
The ITA has not published clear guidance on what constitutes business income in the short-term rental sector, such as the number of instances or a shekel threshold.
In practice, it is usually assumed that rental income from a handful of homes – say five or six – may be considered passive, but any more may result in the entire rental income being taxed as an active business or trading activity. But a Tel Aviv District Court judgment recently raised the bar to 28 homes that were inherited and left rented out.
Business income is subject to income tax and National Insurance Institute payments, generally at rates ranging up to 50%. Bookkeeping rules in Israel apply to businesses, but they generally do not apply to passive activities.
As for the Internet angle, the ITA recently introduced a tax circular that seeks to tax a significant digital presence in Israel; this scarcely seems applicable to smalltime room renters, and in any case the Organization for Economic Cooperation and Development discarded the whole concept of significant digital presence.
As for value-added tax, rental for residential purposes for up to 25 years is exempt from VAT unless the accommodation is at a hotel or guest house, which means accommodation for five or more people. So if a home owner rents out a room for up to four people, the transaction may be exempt from VAT, but it is taxed at rates of up to 50% as a business for income-tax purposes (confusing).
Therefore, the ITA would do well to clarify the taxation applicable to the short-term rental sector before launching sting operations and investigations. Ignorance of the law is one thing, but ignorance of an unpublished new policy is something else.
As always, consult experienced tax advisers in each country at an early stage in specific cases.
[email protected] Leon Harris is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.