1. Overview
Owning and renting out property in Israel — whether a small apartment or a larger portfolio — creates a rental income tax obligation under the Income Tax Ordinance. Israeli law provides several alternative tax tracks for residential rental income, and the right choice between them depends on the landlord's total income, the size of the rent, and whether deductible expenses are significant.
For foreign nationals who own Israeli real estate and rent it out while living abroad, rental income is Israeli-source income and is therefore subject to Israeli tax regardless of the landlord's residency status. This guide explains the system for both Israeli residents and non-residents.
2. The Three Tax Tracks for Residential Rental
Israeli law provides three distinct tracks for taxing residential rental income from Israeli apartments. A landlord may choose the most favourable track each year — the choice is made when filing (or when the tax year closes).
- Track 1 — Full exemption: Monthly rental income below the statutory threshold (currently NIS 5,471/month for 2024) is completely tax-exempt.
- Track 2 — Flat 10% rate: Tax is levied at a flat 10% on the gross rental income, with no deductions allowed. Simple, certain, and often the most practical choice.
- Track 3 — Marginal rate with deductions: Rental income is added to the landlord's other income and taxed at the applicable marginal rate (up to 50%), but deductible expenses (depreciation, mortgage interest, repairs, management fees) can be offset.
The optimal choice depends on the individual landlord's tax position. Track 2 (10% flat) is generally attractive for landlords with modest expenses. Track 3 may be better where deductible expenses are high relative to rental income, or where the landlord has losses to utilise.
3. The Monthly Exemption Threshold
Under Track 1, rental income below the monthly exemption threshold (NIS 5,471 in 2024, indexed annually to the CPI) is entirely exempt from income tax. This is a significant benefit for landlords of lower-value properties.
Important conditions:
- The exemption applies only to residential rental — not commercial or business premises.
- If monthly rent exceeds the threshold, the exemption is partially clawed back. The amount of exemption reduced equals the excess above the threshold — so if rent is NIS 500 above the threshold, the exemption is reduced by NIS 500.
- The exemption applies per landlord, not per property. A landlord with multiple apartments must aggregate all rental income.
- Non-residents are generally not entitled to the monthly exemption — this track is available only to Israeli residents.
For a resident landlord receiving rent of exactly NIS 5,471/month, the full amount is tax-exempt, making this an attractive price point. Rent just above the threshold is subject to a relatively punishing marginal effect.
4. The Flat 10% Track
Under Track 2, the landlord pays tax at a flat 10% rate on the gross rental income — regardless of their other income, deductible expenses, or marginal tax rate. No deductions are permitted under this track.
Practical features of the 10% track:
- Simple — no need to document or calculate expenses
- Certain — the rate is fixed and does not depend on total income
- Available to both residents and non-residents
- Tax must be paid in advance in instalments during the tax year, or by the filing deadline (April 30 of the following year)
For a non-resident landlord with no significant deductible expenses, the 10% flat track is typically the most practical and competitive option — it is lower than withholding rates that would otherwise apply and avoids the need to file a full Israeli tax return.
5. The Marginal Rate Track with Deductions
Under Track 3, rental income is treated as ordinary income, taxed at the landlord's applicable marginal tax rate (which can be up to 50% for high earners), but with the right to deduct:
- Depreciation: At a rate of 2% of the building's cost (not including land) per year — a non-cash deduction that reduces taxable income.
- Mortgage interest: Interest paid on a mortgage taken to purchase or improve the property is deductible against rental income.
- Repairs and maintenance: Genuine repair costs (not capital improvements) are deductible.
- Management and agent fees: Fees paid to property managers or rental agents are deductible.
- Insurance: Building and liability insurance premiums are deductible.
- Municipal tax (arnona) paid by the landlord: Deductible.
This track is advantageous where deductible expenses are high, or where the landlord has other income losses to shelter. For most private landlords without a mortgage, the flat 10% track is typically simpler and often cheaper.
6. Commercial and Business Rental
Rental income from commercial property (offices, shops, warehouses, industrial units) is treated differently from residential rental:
- The exemption threshold and the flat 10% track are not available for commercial property.
- Commercial rental income is always taxed at the landlord's marginal income tax rate, with deductions available.
- Commercial rental by a VAT-registered landlord is subject to 17% VAT — the landlord charges VAT on the rent and the tenant (if VAT-registered) can recover it as input tax. The landlord remits the net VAT to the Tax Authority.
- VAT registration is mandatory for landlords of commercial property above the threshold.
The VAT element of commercial rental significantly increases the administrative burden compared to residential rental — monthly or bimonthly VAT returns must be filed, and proper tax invoices issued to tenants.
7. Non-Resident Landlords
Non-resident landlords (foreign nationals who own Israeli property and rent it out while living abroad) are subject to Israeli income tax on their Israeli rental income, but the rules differ in some respects:
- The monthly exemption threshold (Track 1) is generally not available to non-residents.
- The flat 10% track is available to non-residents and is typically the most practical option.
- Track 3 (marginal rate with deductions) is available but requires filing an Israeli tax return.
- Where a tenant pays rent to a non-resident landlord, the tenant may have a withholding obligation — they may be required to deduct Israeli tax from the rent before paying it to the landlord.
In practice, non-resident landlords often manage their Israeli tax compliance through an Israeli accountant or attorney, who handles the annual reporting and tax payment.
8. Reporting Obligations
Under the flat 10% track, the landlord must:
- Pay the tax in two advance payments: by 30 January for the first half of the year's rent, and by 30 July for the second half.
- File an annual report if required (high-income individuals are generally required to file; lower-income landlords may be exempt from filing if all tax was paid in advance).
Under Track 3, the landlord files a full annual income tax return including the rental income and all deductions, with any balance of tax due by April 30.
Failure to report rental income is a common area of tax non-compliance in Israel — the Tax Authority has been increasing enforcement through data matching between tenancy register entries, municipal records, and tax filings.