Real-estate owners in Israel have the option to choose from three tax payment methods for income received from renting out residential properties. This guide will detail each method and offer a breakdown of the available options, conditions, and their implications, to assist apartment owners in navigating the complexities of tax compliance and financial optimization.
The choice of tax payment method can significantly affect the amount of tax due and potential tax reliefs. Understanding the complexities of each method is vital for apartment owners to make an informed decision that matches their financial goals.
Method 1: Tax Exemption Path
Apartment owners can benefit from a full or partial tax exemption. For example, in 2022, there is a full exemption for monthly rental incomes below ₪5,196. Incomes that exceed this threshold but remain below twice the amount of the exemption qualify for partial exemptions.
In other words, according to this method, if monthly rental incomes total is less than ₪5,196 (as of 2022), these incomes will be exempt from tax.
If the incomes total between ₪5,196 and ₪10,392, a partial exemption applies.
If the incomes exceed a total of ₪10,392, this method cannot be chosen at all.
This method can only be chosen if certain conditions are met, such as the property being used solely for residential purposes and not registered as a business property.
This method is particularly beneficial for apartment owners with low rental incomes, offering significant tax savings. However, it requires meticulous tracking of income to ensure eligibility.
Method 2: Fixed Tax Rate of 10%
Choosing a fixed tax rate of 10% on rental income simplifies the tax process and removes the need to track specific expenses or navigate variable tax rates.
This method is useful for landlords with higher rental incomes, offering predictable and straightforward tax calculation. However, it should be noted that the tax under this method is on the gross income, without any expense deductions.
It's important to mention that this method does not allow for the deduction of expenses related to the rented property and may affect the calculation of capital gains tax if the property is sold. For example, if an apartment owner receives an annual rental income of ₪120,000 (gross) and chooses the 10% tax method, the tax to be paid will be ₪12,000.
Tax payments in this method should be made within 30 days of the end of the tax year in which the rental income was received, and delaying payments may lead to interest.
Landlords need to report and pay tax through the website of the Tax Authority or at the local tax office.
Method 3: Standard Taxation Method
In this method, apartment owners report rental income as part of their total income, using standard tax rates.
According to this method, apartment owners can deduct expenses related to the property for rent, which may reduce the taxable income, with the tax rate based on the landlord's total income level. This makes the method suitable for owners with a more complex financial situation or those seeking to leverage higher expense deductions.
Each method has distinct advantages. While the exemption method offers savings for landlords with lower incomes, the uniform rate provides simplicity, and the standard method allows for more personal flexibility and tax planning.
Apartment owners should carefully assess their rental incomes, property-related expenses, and overall financial situation. Consulting with a professional in the field can provide personalized advice and ensure compliance with Israeli tax laws.