Rental tax: The cheap route this year may be the expensive one in the future
Exemption up to a ceiling, a fixed 10% tax, or a graduated track with expenses and depreciation - the choice seems technical, but it determines how much you will pay this year and how much capital gains tax you will pay upon sale. We break down the numbers, examples, and the depreciation trap.
A landlord receives rent every month, but the tax remaining at the end depends on the chosen track and personal situation. The decision itself is critical: it is necessary to understand when a particular option is profitable and how it will affect the tax on the day the apartment is sold. Three main tracks are available.
Three tax paths
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Exemption track: grants a full exemption when the monthly income from all residential apartments is below a ceiling of 5,654 shekels (the amount also valid in 2026), provided that the apartment is used for residence and the tenant is a private individual.
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10% track: charges a fixed tax on all income from the first shekel, without deducting expenses. Payment is made once a year, by January 30 of the following year.
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Graduated track: adds the rent to other income and charges according to tax brackets, and in return allows for the deduction of current expenses and depreciation.
Let's take for example a landlord who receives 5,500 shekels per month. Assuming he meets the conditions, the income is below the exemption ceiling. The calculation is simple: zero tax, and usually no reporting obligation either. However, for an apartment of 7,000 shekels, the excess above the ceiling is 1,346 shekels. The partial exemption mechanism reduces the exemption by the same amount, so the exemption is eroded to 4,308 shekels and the taxable part reaches 2,692 shekels per month. At the 31% bracket, this is about 830 shekels per month. The partial exemption disappears completely when the income reaches double the ceiling, 11,308 shekels.
The depreciation trap
The exemption track and the 10% track seem cheap every year, but both waive the depreciation deduction. The position of the Tax Authority is that this waiver has a price tag upon sale: in the capital gains tax calculation, the depreciation that could have been claimed during the rental years is taken into account, as if it had been deducted in practice. Thus, the capital gain increases, and the tax increases with it.
For example, an apartment bought for 2 million shekels and rented for 15 years in the 10% track, with a construction component estimated at 1 million shekels, accumulates depreciation of 2% per year (totaling 300,000 shekels). Upon a sale subject to capital gains tax, this amount increases the gain, and at a tax rate of 25%, it is an addition of 75,000 shekels.
Therefore, a landlord planning to sell in two years needs to think differently than a landlord planning to hold an investment apartment for 20 years. As the rental period lengthens, the accumulated depreciation grows, and the benefit of the simple tracks shrinks accordingly. The choice can be re-examined every tax year, and it is made for each apartment separately.
