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Rental Income Tax for Non-Residents in Israel

Q: Do I need an Israeli accountant?

Not legally, but a non-resident landlord usually needs an Israeli representative to open a tax file, choose the track and file or pay on time. The cost is modest compared with the penalties for getting it wrong.

Q: Is the exemption track available to non-residents?

The exemption for residential rent applies to individuals and is not limited to Israeli residents, but the conditions and ceiling must be met. Confirm your eligibility with the Israel Tax Authority or your adviser.

Q: What about the tax when I sell?

Sale of the apartment is a separate event taxed under the Real Estate Taxation Law 5723-1963 as land appreciation tax. Exemptions for a sole residential apartment are generally reserved for Israeli residents, so plan the exit with your lawyer well in advance.

Tax paperwork for rental income from an apartment in Israel

Rental income from an apartment located in Israel is Israeli-source income, so a non-resident owner pays Israeli tax on it under the Income Tax Ordinance even if the rent is paid into a foreign account. Israel offers residential landlords a choice between taxation tracks, and the choice affects both how much tax is due and whether you must file an annual report. The figures that define the tracks change from year to year, so this page explains the structure and leaves the current amounts and rates to the Israel Tax Authority and your accountant.

Who is taxed and on what

Israeli tax residency is decided mainly by where the centre of your life is, with day-count presumptions set in the Income Tax Ordinance. A person who lives abroad and visits Israel occasionally is usually a non-resident for Israeli purposes. Non-residents are taxed in Israel only on Israeli-source income, and rent from Israeli real estate is a clear example. Both long-term residential rent and short-term holiday rent are taxable, though short-term letting that looks like a business can be treated differently, so describe your activity accurately to your adviser.

The three taxation tracks for residential rent

The Income Tax Ordinance and the exemption law for residential rent together give an individual landlord three ways to be taxed on rent from residential apartments:

Exemption track: rent from residential property is exempt up to a monthly ceiling set by law. Above the ceiling the exemption is reduced and then lost. The ceiling is updated periodically; check the current figure with the Israel Tax Authority.
Reduced flat-rate track: a fixed rate is applied to the gross rent with no deduction for expenses, depreciation or interest. The rate is set in the Income Tax Ordinance; confirm it before relying on it.
Ordinary track: rent is taxed at the taxpayer's marginal rates after deducting allowable expenses, such as management fees, repairs, insurance, depreciation and, in some cases, mortgage interest.

Which track is better depends on the rent, your expenses and your other Israeli income. The choice is not always available for every type of letting, and a landlord who chooses one track for one year is not necessarily bound to it in the next. The Israel Tax Authority publishes a guide to the tracks and updates the figures every year.

The annual report

Whether you must file an Israeli annual tax return depends on the track and on your other Israeli income. In broad terms, a non-resident whose only Israeli income is residential rent that is fully exempt may have no filing duty; a landlord on the reduced flat-rate track must pay the tax to the Tax Authority by the deadline set for that track; and a landlord on the ordinary track files a full annual return. Filing involves opening a tax file with the Tax Authority, which a non-resident usually does through an Israeli accountant or tax representative. Ask your representative to confirm the current filing and payment deadlines, since late filing carries penalties and interest.

Your home country and tax treaties

Most countries tax their residents on worldwide income, so the same rent is usually reportable at home. Israel has double-taxation treaties with many countries; these treaties generally give the country where the property is located the first right to tax rental income and oblige the home country to give credit or relief for Israeli tax paid. The mechanics depend on the specific treaty and on your home-country rules. Keep the Israeli assessment and payment receipts, since they are the evidence for claiming credit at home.

Records to keep

The lease and any extensions, with the rent and payment dates.
Bank records showing rent received, including rent paid to a management company on your behalf.
Invoices for repairs, insurance, management fees and municipal charges you paid as owner.
Mortgage statements showing interest paid, if you are on the ordinary track.
The purchase contract and purchase costs, which will be needed later for land appreciation tax when you sell.

Common mistakes

Assuming rent paid to a foreign account is outside Israeli tax.
Choosing the exemption track when the rent is above the ceiling and the exemption has already been reduced.
Missing the payment deadline on the reduced flat-rate track.
Not declaring the rent in the home country and losing the right to treaty relief.
Keeping no expense records and then being unable to use the ordinary track when it would have been better.

FAQ

Do I need an Israeli accountant?