If proposed real estate reforms move forward in the Knesset in the coming months, the Israeli government may soon begin to collect higher taxes from landlords with rental property investments. The changes aim to combat Israel's overheated housing market by targeting second home owners or investors whose rental income from residential properties is tax-exempt if their rental income is no more than NIS 5,470 under current tax rules. The new government's draft Economic Regulations Bill, which sets out how funds will be allocated from the national budget, proposes that the government should reduce existing tax exemptions on rental income for private landlords whose numbers have fluctuated over the past two decades but have steadily risen. In 2022, Tax Office figures showed that 13% of Israeli households own two or more properties that they lease to tenants, compared to 3.2% of households in 2003. For these investors, rental income over NIS 5,470 is taxable up to 31%. And if the rental income exceeds NIS 10,940 in total, the full amount is taxable. In recent years, this figure has increased in line with inflation - currently 5.4%. By gradually eroding the tax-exempt amount, an increasing proportion of rental income will fall under regular income tax. In turn, this could add billions of shekels to a housing budget. for ToI's free Real Estate Israel Newsletter email address By signing up, you agree to the terms The original tax exemption was introduced in the 1990s, when large numbers of immigrants from countries of the former Soviet Union began to come to Israel. To increase the market supply of rental homes, there was a need to encourage property owners to rent out flats rather than keep them empty. In a market where the population that has no choice but to rent is increasing day by day, tax exemption continues to encourage vacant flats to be rented. But the advantageous tax treatment also encourages real estate investments that operate in the real place, which drives homes off the market as primary residences and drives prices up. Other forms of real estate investment are treated much less favorably. Income from real estate funds or real estate stock dividends is taxable at a minimum of 25%. These lesser forms of direct investment also did not yield significant capital gains for real estate investments, as housing prices increased by an average of 17.1% across Israel over the past year. Advertising As landlords pass on the increased costs to tenants, there is a significant risk that an increased tax on rental income will push rent prices higher. Rental prices are already high and are increasing faster than the inflation rate, averaging over 8% annually. The cost increases of new leases rather than extensions of existing leases are likely to be even higher. Some people who rent a property only own one home. Often this is because they cannot buy a house directly in the area they want to live in and so they buy in a cheaper area and rent out the space they own as a way to get up the residential ladder at an affordable cost. The draft law makes it clear that the government wants to recognize this group of property owners as a separate group from other landlords and allow them to enjoy tax-free rental income up to a higher level of NIS 7,500 per month. . Other proposed real estate-targeted measures include a special tax on the purchase of an investment flat . The purchase tax for investment purchases jumped from five percent to a minimum of eight percent in the fall of 2021, but this increase appears to have had little effect in slowing the rise in long-term home prices. There was also talk of introducing changes for short-term rentals , treating them as businesses, and creating a tax-level playing field with hotels. Advertising Elsewhere in the proposed fiscal framework there are provisions that would allow local municipalities to increase local property taxes for residences to encourage residential construction. Currently, municipalities receive higher revenues from taxation of business and commercial zoned properties compared to housing. This means that each new residential unit built represents a loss of revenue, especially compared to the commercial use of the land. This may encourage home building at the local level, but the plan will increase housing costs for both landlords and tenants and will be directly fed by higher inflation and a higher overall cost of living. These proposals aim to increase tax revenues from Israel's residential real estate and raise money that can be spent on building much-needed new homes. But they are unlikely to lower housing prices. It remains a target for the newly assembled housing cabinet, which is committed to submitting proposals to improve the affordability of housing in Israel, but has not yet started work. Gotopnews.com