In Israel, the taxation method is personal and territorial. This means that a resident of Israel is taxed on his income in Israel and abroad and a foreign resident is taxed on his income, which is generated only in Israel.
There are 3 taxation paths which can be chosen by the taxpayer. The tax routes are also valid for a foreign resident who receives rent.
The following are the three taxation routes for rental income in Israel that can be chosen by the taxpayer:
1. Exemption route-
If your income from rent does not exceed the exemption ceiling per month, you will be free to pay tax on this income. The exemption ceiling is updated every year and in 2021 was set at a total of NIS 5,090 per month. Note: Checking if you meet the exemption ceiling will be done without offsetting expenses against rental income.
Partial exemption- If the rent rises slightly above the exemption ceiling, it must be considered whether this tax route is suitable for the taxpayer. For example: The rent received in 2021 is NIS 70,000 per year in a monthly distribution of NIS 5,833, hence the rent exceeds the exemption ceiling. (5,833-5090) = 743 NIS excess amount (5,090-743) = 4,347 exempt amount (5,833-4,347) = 1,486 taxable amount In this route, it is possible to reduce the expenses of maintaining an apartment proportionally between the taxable amount and the total income of the apartment.
Note: If the rental income exceeds the double exemption ceiling, you will not be able to use the partial exemption route.
2. The 10% route -
In this route, expenses cannot be deducted and the total rental income will be taxed at a rate of 10% of the first shekel.
For example, the rental income from an apartment in Israel is NIS 90,000 per year. In choosing a 10% route, you will pay NIS 9,000 in annual tax. If you have several apartments, you can combine an exemption route and a 10% route. Only if your total income from all residential apartments does not exceed double the exemption ceiling For example: The total rental income for 2 apartments in Israel that you own is NIS 6,500 per month. Monthly rent from one apartment is NIS 3,500 and from the other apartment a total of NIS 3,000. For one apartment we will pay 10% and for the other apartment the following calculation will be made. Exemption ceiling - NIS 5,090 per month for the year 2021
Excess amount (6,500-5090) = 1,410 NIS Exemption amount (5,090-1,410) = NIS 3,680 Therefore, the rent for the first apartment in the amount of 3500 will be tax-exempt, but for the second apartment whose rent is NIS 3,000, a tax of 10% will be paid.
3 Individual tax track In this route, it is possible to demand current expenses that were in the production of income from the rent. For example: financing expenses for the purchase of the house, depreciation expenses for the property, maintenance expenses for renovating and maintaining the existing one, attorney expenses in preparing the lease, accountant expenses and more. This route taxes the rental income after deducting expenses at a tax rate starting at 31% taking into account the total income of the taxpayer. For those aged 60 and over, reduced steps of starting from 10% will be melted in this route. Note: Foreign residents, unlike Israeli residents, do not have credit points that allow them to be credited with tax obligations. There is an agreement to prevent double taxation between countries, usually the first taxing right belongs to the country in which the income is generated in Israel. The tax paid in Israel will be given a tax credit in the foreign resident country.
You can get a consultation for reporting, and payment of rent by a foreign resident, 073-254-9512 For callers from abroad +972-54-8018226 +972-073-254-9512