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

Category: Encouragement Law | Updated: October 2026 | Reading time: approx. 7 minutes

Chapter Seven 1 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 track in its current form — the "institutional rental building" — was introduced in a 2021 amendment to the law and is open to applications filed until the end of 2031; the earlier "rental building" tracks apply only to applications filed by the end of 2023. The benefits under this track are comprehensive and substantial — reduced tax on income from letting and sale, accelerated depreciation, reduced purchase 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 tax on income from letting the apartments and from selling them, at rates that fall as the rental period lengthens. For a company — 11% in the first rental period, and then 9%, 7% and 5% (instead of 23% corporate tax). For an individual — 29% in the first rental period, and then 27.5%, 25.5% and 24% (instead of marginal tax). Each rental period is at least five years of letting on average, out of six years.
• Reduced dividend tax on dividends sourced from income from the building — a rate of 20%.
• Accelerated depreciation at a rate of 20% per year on an apartment that was let for residence.
• Reduced purchase tax at a rate of 0.5% for a buyer who purchases the apartments from the developer and continues to let them (a "continuing lessor"), under the conditions set in the law.
• 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 10 apartments in the building, or at least 6 apartments in a peripheral area.
2. Scope of letting — at least 66% of the apartments in the building (30% in a peripheral area), and no fewer than the minimum number of apartments, are designated for long-term letting.
3. Rental period — the apartments are let for at least 15 years on average, out of the 18 years following completion of construction.
4. Long-term leases — a written lease that gives the tenant at least five years of tenancy, with a right to extend the tenancy to at least ten years in aggregate, a rent-update mechanism fixed in advance, and a right for the tenant to end the tenancy at the end of each year on prior notice.
5. Pre-approval — the application for approval of the plan is filed with the Investments Authority before completion of construction, together with the building permit.

Regular Track vs. Preferred Track Comparison

To illustrate: a company that owns an institutional rental building, with taxable income from letting of ILS 500,000 per year.

• Regular track: corporate tax of 23% — liability of ILS 115,000.
• Institutional-rental track, in the first rental period: tax of 11% — liability of ILS 55,000, and a saving of ILS 60,000 per year.
• Later on: the rate falls to 9%, to 7% and finally to 5% — liability of only ILS 25,000, and a saving of ILS 90,000 per year.

Assuming constant income and five years for each rental period, the cumulative saving over the first 15 years of letting comes, in this example, to more than one million shekels. For an individual the preferred rates are higher — 29% down to 24% — so whether the track pays off also depends on how the building is held. 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 designated for letting during the commitment period, other than to a continuing lessor — retroactive cancellation of the benefits and payment of the tax saved, with linkage differentials and interest.
• 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.