For Apartment Landlords: Who Is Eligible for Full Exemption, and Who Could Get Entangled With the Tax Authority?

Summer months are traditionally the “hot season” of the rental market. Families, students, and people upgrading their housing use the summer months to move apartments and get organized ahead of the next school year. This year the trend is even more pronounced, in light of data indicating a significant slowdown in the sale of new apartments and an increase in demand for rentals—which also pushes prices upward. According to data from the Central Bureau of Statistics from about two weeks ago, in apartments where tenants changed, prices jumped by 6.6% on average compared with the corresponding period last year.

The impact on tenants is clear, but in some cases it also affects apartment owners, who need to take into account payment to the Tax Authority as well. Who is completely exempt from paying tax, what happens if landlords and tenants are renting simultaneously, and how does the reporting system work? Here is a guide that every apartment owner should know.

Main Taxation Tracks

There are three main tracks for apartment landlords:

1. Exemption track: The most popular. Anyone in it is not required to pay tax on rental fees and, in some cases, not even to report it. This track is intended for those whose monthly rental income is lower than the tax-exemption ceiling of 5,654 shekels. There is also partial exemption for those who rent apartments at up to double the exemption ceiling—11,308 shekels per month. Above that amount, there is no exemption.

2. Reduced tax track: A fixed rate of 10% from the first shekel. In this case, there is no option to deduct expenses for repairs, wear and tear, or any other event that led to an expense.

3. Regular tax track: Paying according to personal tax brackets based on total income (the lowest bracket is 31%, unless the landlord is over 60). It is possible to deduct expenses related to renting out, including repairs, interest, and depreciation, provided they improved the property.

If the property is used for the tenants’ business activity, a file must be opened and income reported from any amount. The tracks above are relevant only for residential rentals.

Reporting and Ceilings

The exemption ceiling is updated according to the consumer price index on every 1 January. However, since the government's cuts program in early 2024, the ceiling has been frozen, and it is not yet clear when it will be updated again.

The exemption is calculated month by month. If a person has more than one rented apartment, the exemption relates to the total income. If monthly rent exceeds 5,654 shekels but is lower than 11,308 shekels, you are entitled to partial exemption: for every shekel by which you exceed the ceiling, your exemption ceiling shrinks by one shekel.

Simultaneous Renting

Single-property owners who rent it out for residential purposes and, at the same time, rent another apartment, can deduct from the rent they receive the amount they pay, up to a ceiling of 7,500 shekels per month, and pay 10% tax only on the difference.

Reporting Obligations

Anyone who chose the exemption track and does not meet the criteria that require paying tax is not required to report their rental income. Anyone on the 10% track must report and pay the tax by 30 January of the following year. Anyone who chose the regular tax track is required to file a full annual report.

Failure to report is a criminal offense. Despite the lack of a central database of apartment landlords, the Tax Authority has tightened oversight using advanced technological tools that enable cross-referencing.

Special Cases

• More than 10 apartments: The Tax Authority may ask to recognize the income as a business.

• Seniors (65+): Those who move to a nursing home or assisted living are entitled to tax exemption on rental income from their original apartment—up to half of the annual payment they pay to the nursing home.

Choosing a tax track has long-term implications for capital gains tax. Attorney Hanna Salomon, a partner at BDO, explains that choosing the 10% or regular tax track means depreciation (2% per year) is deducted from the property’s cost, increasing taxable capital gains upon sale. In the exemption track, the Tax Authority also insists on deducting depreciation, though this is currently awaiting a Supreme Court decision.