Tax Authority: Renting 10 homes constitutes a business

Rental apartment

Cases of people leasing 5-9 housing units will be considered on an individual basis.

Leasing 10 or more housing units constitutes a fully taxable business subject to tax that is likely to reach 45-50%, according to the Israel Tax Authority. There are 400 private citizens in Israel who own 10 or more housing units liable to subjected to this tax. People leasing up to five private housing units that they own are entitled to a reduced 10% tax rate, and those with 5-9 housing units will have to convince the Israel Tax Authority that they should be granted the reduced rate. There over 6,000 owners of 5-9 housing units liable to find themselves in a dispute with the Tax Authority about their rental income.

These new rules are set forth in a draft circular for public comment that the Tax Authority is publishing today on classification of income from rental housing units. Publication of the circular follows a Supreme Court ruling in January involving Advocate Shraga Biran. The court ruled that Biran, one of Israel's wealthiest lawyers, must pay the tax applying to a business on his income from leasing 24 housing units that he owns in Tel Aviv, Jerusalem, and Rehovot, instead of a reduced tax rate applying to private leasing of housing units.

The ruling was made in the framework of an appeal filed by the Tax Authority against a ruling by the District Court in Biran's case and another appeal filed in the case of Dafna and Dan Leshem, siblings who inherited 24 housing units and four business properties from their late father and leased all of these properties at NIS 500,000 per year per property. The District Court ruled that they would also pay the reduced 10% tax rate applied to citizens privately leasing housing units.

The Supreme Court upheld the two appeals filed by the state, ruling that both Biran and the Leshems must pay the same tax on the leasing of the housing units as someone operating a business, rather than the tax applying to owners of private housing units entitled to a lower rate.

The Tax Authority thereupon published its view of the matter in the circular, which explains the considerations according to which the income from rental housing units should be considered income from business, rather than passive income (private income entitling the lessor to a lower tax rate).

According to the Tax Authority income from leasing 10 or more housing units will be classed as business income. In order to provide some degree of certainty, the Tax Authority assumes in its circular that income from leasing less than five housing units will be considered passive income. The cases of people leasing 5-9 housing units will be judged by the various criteria listed in the circular, which will determine whether the income is business or passive income.

Published by Globes [online], Israel Business News - www.globes-online.com - on February 7, 2018

© Copyright of Globes Publisher Itonut (1983) Ltd. 2018

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