Israel Considers Tax on Rental Income in Exchange for Lower Purchase Tax
Translated & summarized from Globes by baba
Israel's Finance Ministry is considering taxing all rental income from the first shekel, eliminating current exemptions, as part of the upcoming Arrangements Law. This move aims to combat the shadow economy in real estate and could generate billions in tax revenue. In exchange, the ministry is proposing a reduction in the property purchase tax for investors. However, key officials are reportedly hesitant about this "deal," and consensus has not yet been reached on linking the two measures.
The story in 6 lines · by baba
- Israel's Finance Ministry may tax all rental income, eliminating current exemptions, as part of the Arrangements Law.
- The proposal includes creating a registry requiring landlords to report all rental agreements.
- In exchange for taxing rental income, a reduction in property purchase tax for investors is being considered.
- The Tax Authority estimates taxing rental income could generate NIS 2 to 5 billion annually.
- Key officials are reportedly hesitant about linking the rental income tax to purchase tax reductions.
- The current exemption for rental income up to approximately NIS 5,600 is seen as encouraging the black economy.
Israel's Ministry of Finance is exploring a proposal to impose a tax on all rental income from the first shekel, eliminating the current exemption ceiling of approximately NIS 5,600. This initiative, part of the upcoming Arrangements Law, also includes establishing a registry for rented properties, requiring all landlords to report their rental agreements. These plans, previously stalled by political opposition, are being revived by the Tax Authority, which estimates billions of shekels are operating in the shadow economy within the real estate market. The authority views these measures as crucial for closing loopholes in the rental market, much of which currently operates "under the radar."
To soften the impact of taxing rental income, the Finance Ministry is considering a reduction in the property purchase tax for investors. This potential "deal" was presented during recent meetings of a special "Committee of Three," tasked with significant tax reforms and combating the black economy ahead of the 2027 state budget and Arrangements Law. The committee's work is led by Mehran Frouzanfar, Director of the Budget Division, Chief Economist Dr. Shmuel Abramzon, and Tax Authority Director Shai Aharonovitz.
The proposed exchange involves taxing all rental income in return for lowering the purchase tax. Currently, property purchase tax rates differ significantly between primary residence buyers and investors purchasing additional properties. A temporary order set the purchase tax for additional properties at 8% up to NIS 6,055,070 and 10% above that, which was set to expire in January 2027 but was extended to February due to elections. However, the committee's leadership, including Frouzanfar and Abramzon, is reportedly not fully convinced by this "deal."
"There is no deal right now," stated a source familiar with the committee's work, adding that while some in the real estate team favor lowering the purchase tax, it's not a consensus among the Committee of Three members. The Tax Authority estimates that taxing rental income from the first shekel could generate NIS 2 to 5 billion annually. The current exemption for rental income up to a certain threshold is seen by the Tax Authority as encouraging the black economy and being inequitable.
While professional elements within the Finance Ministry have supported maintaining higher purchase tax rates for market certainty, political factions have advocated for lower rates to stimulate the stagnant real estate market. The Tax Authority has not taken a firm stance, though some believe lower purchase tax rates could increase overall tax revenue through more transactions. Tax Authority Director Shai Aharonovitz noted that the decision on extending the temporary order for purchase tax rates is complex, with differing opinions among officials regarding its impact on the housing market.