The law, okayed by the Ministerial Committee gives building owners a one-time chance to set the level of depreciation on the building up to 20%.
By AVI KRAWITZrentals 88 298(photo credit: Ariel Jerozolimski)
Israel's rental-apartment market may be set to open up after the government passed a resolution Tuesday to encourage the development of apartment buildings designated for exclusively for rentals.
"With such a law, young couples and others won't be forced to take on suffocating mortgages and will be able to live in rentals for a long period and continue to have a high standard of living," said Housing and Construction Minister Meir Sheetrit, who proposed the legislation. "The government will encourage the building of thousands of rental apartments."
The law, approved by the Ministerial Committee for legislative matters, widens the tax incentives for developers of buildings in which apartments would be available for rent only.
It gives building owners a one-time chance to set the level of depreciation on the building up to 20%, then can be written off as a business expense or against the construction cost of the building. In addition, income from rentals would be subject to regular taxation and not according to taxes set by the investment encouragement law or the 10% applying to individuals.
The law proposes that the building be available for rent for at least a 25-year period and that should the building be sold after 10 years of rentals, the seller would be exempt from capital gains tax as long as the buyer agrees to rent the apartments for another 15 years.
Some property professionals, however, were skeptical that the new law would boost the market for rental buildings.
"The idea is good and the government should be commended, but we have had tax incentives for such buildings in the last 10 years and there have only really been one or two projects that have come up," said David Baruch, CEO of the Bank of Jerusalem. "The reason for this is that the rate of return on rentals in Israel is very low at 3 percent to 5% and investors expect around 8% return on their investments."
Adding to his skepticism, Baruch explained that the demand for these apartments was coming from students and low income earners and that there was not a shortage of rentals in those areas that they could afford.
In addition, he explained that the labor market does not play up the need for long-term rental commitments as it does in the US or the UK since many Israelis are able to commute to work and, therefore, do not necessarily need to move where their jobs dictate.
Others, however, are hoping the legislation will bring a welcome relief to the overburdened rental market in the cities.
"If this opens up rentals it will be an excellent move as it is currently impossible to find apartments for rent," said Bernard Raskin, regional owner of Remax Israel. "In certain areas like Tel Aviv, the lifespan of apartments on the market is a matters of hours and also not everyone is in a position to buy.
While previous tax incentives for such projects had failed to generate much interest in the Israeli market, Raskin said not enough had been done to make the projects worthwhile business opportunities for investors.
The law will apply only to buildings with at least 16 apartments and which will be completed in the 2007 tax year and after.
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