Capital Investment Encouragement Law — Tax Benefits for Long-Term Rental Buildings

Category: Encouragement Law | Reading time: approx. 7 minutes

Chapter 7A of the Capital Investment Encouragement Law, 5719-1959, was enacted to address Israel's housing crisis by incentivizing developers and institutional investors to build and operate long-term rental buildings. The benefits under this track are comprehensive and substantial — reduced income tax, accelerated depreciation, reduced betterment tax, and more — but they are conditional on meeting strict thresholds. This article reviews the benefits, conditions, process, and strategies for optimal use of the law.

What Are the Main Benefits?

Owners of a building approved under the institutional-rental track are entitled to a generous benefits package:

• Reduced income tax on rental income: 11% for individuals and 11% for companies (instead of marginal tax or 23% corporate tax).
• Reduced betterment tax on sale of the building — only 20%.
• Accelerated depreciation of up to 20% per year on the building structure.
• Partial purchase-tax exemption in certain cases.
• Possibility of building consolidation and receiving benefits for the entire complex.

Threshold Conditions

The law sets relatively rigorous conditions to prevent improper exploitation:

1. Minimum number of apartments — at least 6 apartments per building (and more in some tracks).
2. Rental only — apartments must be rented out long-term, not sold.
3. Minimum rental period — at least 15 years from delivery (in the newer tracks).
4. Pre-approval from the Investments Authority and Tax Authority — before income begins.
5. Rent caps in some tracks, especially in priority areas.

Regular Track vs. Preferred Track Comparison

To illustrate: a private owner operating a rental building with gross income of ILS 500,000 per year.

• Regular track: marginal tax up to 50% — liability of up to ILS 250,000.
• Preferred institutional-rental track: tax of 11% — liability of ILS 55,000.
• Potential annual saving: approximately ILS 195,000.

Over 15 years of operation, savings may reach millions of shekels. Accelerated depreciation also substantially reduces taxable income in the early years.

Application and Approval Process

Receipt of benefits is not automatic — a formal process is required:

1. Application to the Investments Authority — building plans, permits, future rental contracts.
2. Initial approval — preliminary letter of allocation supplementing the required conditions.
3. Construction completion and unit delivery — within defined timelines.
4. Final approval letter — serves as the eligibility certificate for benefits.
5. Special annual reporting in the annual return to the Tax Authority.

Common Mistakes to Avoid

• Failure to apply in advance — benefits cannot be received retroactively.
• Selling apartments during the commitment period — revocation of benefits and retroactive penalties.
• Failure to maintain the minimum number of rental apartments — risk of revocation.
• Lack of orderly documentation of rental and maintenance contracts.
• Neglecting accelerated-depreciation calculations — loss of significant benefit.

Summary

The institutional-rental chapter of the Capital Investment Encouragement Law is a significant tax tool that can save millions of shekels over the operating years. The benefits are generous, but conditions are strict and the process is formal. Early planning and professional support are the keys to success — and the process must start at the project's planning stage, not after income begins.