• Thu. Oct 5th, 2023

Property Investors Could Lose Tax Breaks due to Real Estate Reforms

Feb 18, 2023

The new government in Israel has proposed real estate reforms that are expected to move forward in the Knesset in the next couple of months.

Should that happen, it would mean that homeowners who have invested in rental property will have to pay higher taxes.

The changes

The housing market in Israel has become extremely overheated and the changes are meant to tackle this issue.

Therefore, it is targeting investors, or second-home owners, who are currently not required to pay any taxes on rental income less than NIS 5,470.

The Economic Arrangements Bill that has been drafted by the new government proposes that the current tax exemptions available to private landlords on rental income should be reduced.

In the last two decades, there has been a fluctuation in the number of private landlords, but they have been trending up for the most part.

Tax Authority figures for the previous year showed that around 13% households in Israel own two or more properties, which are rented out to tenants.

In 2003, only 3.2% households in Israeli owned two or more properties. The current rule dictates that 31% tax is applicable on any rental income above NIS 5,470.

The taxation

If rental income exceeds NIS 10,940, even if it is from multiple properties, then tax is charged on the entire amount.

This number has risen in accordance with inflation and currently stands at 5.4%. If the tax-free amount is eroded gradually, it would mean that a greater number of rental revenues will be taxed.

It would help in providing billions of shekels to the government, which can be used for a housing budget. The original tax exemption on rental income had been rolled out in the 1990s.

This was when huge number of immigrants had begun to come to Israel from countries that were part of the former Soviet Union.

To accommodate people, property owners had been given the exemption to encourage them to rent out their apartments instead of keeping them empty.

Real estate investments

Even today, the tax exemptions continue to encourage people to rent their properties instead of leaving them empty.

These days, a greater proportion of the population has no other choice but to live on rent. The problem is that this favorable tax treatment also encourages bricks-and-mortar property investments.

This can drive up prices. The treatment of other kinds of real estate investments is not this favorable. There is a 25% tax applicable on real estate share dividends, or income from real estate funds.

Likewise, these investments have not been able to offer the same kind of capital gain as that of property investments.

This is due to the fact that there has been a 17.1% increase in housing prices in Israel in the last year. There is also a risk that rental prices could go up if taxes on rental income are hiked.

It could be a problem, given that rental prices are already quite high and are rising at 8% year-on-year, significantly faster than inflation.

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