An important amendment has been enacted relating to the income tax due if you rent out a home in Israel [Income Tax Ordinance Amendment Number 159]. This updates our articles in this column in The Jerusalem Post on March 21 and August 8, 2007. 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 exempt 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% and 48% (plus National Insurance where applicable) after deducting permissible expenses. * Elect to pay 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, and the 10% tax had to be paid within 30 days after receiving the rent. In practice, most landlords missed out on the "opportunity" to pay 10% tax within 30 days after receiving the rent. The new amendment states that taxpayers may now pay the 10% tax on gross rental income within 30 days after the end of the tax year, i.e. by January 10 of the next year. This applies to residential rental income received in 2007 onwards. It enables taxpayers to wait until the end of the year to see which tax treatment they prefer. For residential rental income received in 2006, the exempt rental amount was only NIS 3,830 per month. However, the new amendment allows you to elect the 10% tax option now, if you pay the tax for 2006 by November 13, 2007 (i.e. next week). Since this tax is considered late, interest and indexation will also be payable. Exceptions may apply - for example if renting apartments is a business activity, you will be taxable at regular rates. It is not always clear what constitutes a business - some say that renting out more than, say, five homes is close to a business activity, especially if the homes are financed with borrowed money or are not held for the long-term. In some cases, you want to invest in real estate or other investments or activities via a "family company." Legally speaking, a family company is a company like any other, with the limited liability, usually. However, for Israeli tax purposes, the company is ignored - instead the main shareholder is taxed as if he or she derived the company's income directly. If you want family company status to begin in 2008, file your election with the tax authority by November 29, 2007, on Form 2585 Aleph. We will discuss family companies further in a separate article. As always, consult experienced tax and legal advisers in each country at an early stage in specific cases. email@example.com Leon Harris is an International Tax Partner at Ernst & Young Israel.