Rental Income Tax: The Three Tracks in Israel — and What to Do with a Property Abroad

Category: Real Estate Taxation | Reading time: approx. 8 minutes

Hundreds of thousands of Israeli households rent out an apartment — and many of them pay more tax than they owe, simply because they chose the wrong track, or did not know a choice existed at all. The Income Tax Ordinance offers a landlord of a residential apartment in Israel three alternative taxation tracks, and a landlord of property abroad — two more. The choice is made each year, and depends on the rent level, the expenses, your age, your other income and even the mortgage on the property.

Track One: The Tax Exemption — Up to the Ceiling

Income from renting out a residential apartment in Israel is tax-exempt up to a ceiling of NIS 5,654 per month (for the 2024–2026 tax years). The exemption is tested for each month separately, and applies to the combined residential rental income of both spouses — from all apartments they own.

Here lies the point many people miss: if the rent exceeds the ceiling, the exemption does not vanish at once — it erodes gradually. The mechanism: every shekel above the ceiling reduces the exemption by one shekel (the "adjusted ceiling"). For example, at rent of NIS 7,000 a month: the excess is NIS 1,346, so the exemption drops to NIS 4,308 — and the remainder, NIS 2,692, is taxed at marginal rates (with a proportional deduction of expenses). At rent of NIS 11,308 or more (double the ceiling) — the exemption is wiped out entirely and the whole income is taxable.

This track is best for landlords whose rent is below the ceiling — then there is simply no tax and no filing obligation (for those not otherwise required to file). In the zone between the ceiling and double the ceiling a calculation is needed, and another track sometimes turns out better.

Track Two: A Reduced 10% Tax — Section 122

The most popular alternative: paying tax at 10% of turnover — of the gross rent, from the first shekel. The conditions and rules:

• The track applies only to residential rental in Israel, and only as long as the income does not amount to a business;
• No expense deductions — no mortgage interest, no repairs, no depreciation and no management fees;
• No exemption, no offsets and no credits against this income;
• The tax is paid in one concentrated payment by January 30 of the following year — being late may forfeit eligibility for the track;
• An important recent addition: someone who rents out their only apartment and themselves lives in a rented home (or in assisted living), may under certain conditions deduct the rent they pay, up to NIS 90,000 a year — and pay 10% only on the difference.

This track excels in simplicity and usually pays off when the rent is above the exemption ceiling and the property's expenses are low. It is less attractive when there are significant expenses — chiefly a mortgage with a high interest component.

Track Three: Marginal Rates — With Full Expenses

The "regular" track: the rental income joins your total income and is taxed at your marginal rate. Passive rental income is taxed starting at the 31% bracket — but anyone aged 60 or over enjoys the ordinary brackets, starting at just 10%. In return, the track allows deducting all expenses incurred in producing the income:

• Mortgage interest and linkage differentials;
• Depreciation on the building;
• Repairs and ongoing maintenance;
• Management fees, brokerage, professional fees and insurance.

Who is it for? Mainly two profiles: those aged 60+ with low other income (e.g., pensioners) — whose effective marginal rate is below 10%; and landlords with high expenses — for example a heavily mortgaged apartment, where interest and depreciation wipe out much of the taxable profit.

So Which Track to Choose? A Numeric Example

An apartment rented at NIS 8,000 a month (NIS 96,000 a year), with a mortgage whose annual interest component is NIS 22,000, and annual depreciation of NIS 15,000:

• The partial-exemption track — the exemption erodes to NIS 3,308 a month; the taxable remainder of about NIS 4,692 a month is taxed at marginal rates (with proportional expenses) — for a landlord in the 31% bracket the tax can reach tens of thousands of shekels;
• The 10% track — 10% × 96,000 = NIS 9,600, simple and final;
• The marginal track — taxable income: 96,000 − 22,000 − 15,000 = NIS 59,000. For a young landlord in the 31% bracket the tax is about NIS 18,290 — worse. But for a 67-year-old pensioner for whom this is the main income — the tax may be below NIS 7,000, beating all the others.

The conclusion: there is no universally "right" track. The very same apartment — a different optimal track for different people, and sometimes for the same person in different years.

When Does Renting Become a Business?

The three tracks apply only to passive income. As the scale grows, the Tax Authority may classify the activity as a business — and then the preferential tracks are denied, and the income is taxed at full marginal rates plus National Insurance and sometimes VAT. Following Supreme Court case law, the Tax Authority's position is that renting out 10 or more apartments constitutes a business; fewer than 5 apartments — presumed passive; and in between — a case-by-case examination under the business tests. If you are approaching that zone, plan ahead.

A Property Abroad: Two Tracks — Section 122A

Many Israelis hold income-producing real estate abroad — the US, Greece, Cyprus, Portugal, Georgia and elsewhere. An Israeli resident is taxed in Israel on worldwide income, and here too the Ordinance offers a choice between two tracks, made anew each year:

The 15% Track (Section 122A)

• A flat tax of 15% on gross income minus depreciation only — no other expense deductions;
• No foreign tax credit — tax paid in the country where the property is located is not offset;
• Applies only when the income does not amount to a business;
• Relatively simple — and usually worthwhile when the tax in the source country is low or zero.

The Regular Track — Marginal Rates with a Foreign Tax Credit

• Net income (after all expenses: interest, depreciation, management, repairs, travel related to the property) is taxed at marginal rates;
• Tax paid abroad is offset against the Israeli tax through the foreign tax credit mechanism, per the tax treaty with that country;
• More complex to report — but usually worthwhile when the foreign tax is high (e.g., the US) or the expenses are significant.

A rule of thumb: in countries with low tax on rent — the 15% track tends to win; in high-tax countries — the regular track with the credit. But it is only a rule of thumb: leverage, accelerated depreciation in the source country, rental losses and the holding structure (direct, a US LLC, a foreign company) all change the picture, and each structure carries different reporting implications. With foreign real estate, plan the tax track before the purchase — not after.

And Don't Forget: Reporting and National Insurance

• Rental income under the 10% or 15% track requires reporting and payment even if you have no income tax file — via a shortened report or an annual return;
• A property abroad generally requires filing a full annual return, and above the set thresholds — capital declarations and dedicated disclosures as well;
• Passive income from residential rental is generally exempt from National Insurance contributions — but for foreign income the exemption depends on the chosen tax track, a point worth checking because it can tip the scales between the tracks;
• Unreported rental income — in Israel or abroad — is one of the most common triggers for voluntary disclosure proceedings. See: Voluntary Disclosure.

The above article is provided for general information only and does not constitute professional advice or a substitute for specific consultation. The amounts, ceilings and rules are updated from time to time and include conditions and qualifications not fully detailed here. For any question, you are welcome to contact us.

Sincerely,
Hager-Alperowitz & Co. — Certified Public Accountants