Imagine thinking you owe thousands of shekels in tax—only to find out you owe nothing. That’s exactly what happened to a landlord who owns a few rental apartments in Israel. And the reason? A simple misunderstanding of the tax rules that many landlords make.
If you rent out apartments in Israel, especially for residential purposes, this could save you a lot of money—and stress. Let’s break it all down in everyday language.
A Common Scenario: Three Apartments, ₪7,000 Monthly Income
One property owner had three apartments rented out, bringing in about ₪7,000 each month in total. Assuming tax was unavoidable, they calculated a 10% tax on the entire amount—coming to around ₪700 per month or ₪8,400 a year.
But the reality was completely different.
The Residential Rental Tax Exemption in Israel
Israel offers a monthly tax exemption for landlords who rent out apartments for residential use (meaning people live there, not for business or office purposes). That exemption limit is about ₪5,650 per month (this number is updated yearly).
Here’s how it works:
- If the total rental income from all residential apartments is less than this threshold, no tax needs to be paid—at all.
- If the income is above the threshold, there are different tax routes available, and some allow for expense deductions.
This is where many landlords get confused. They hear that anything over the limit is taxable and assume they owe 10% on the entire amount. But that’s not the full story.
The 10% Tax Option: Easy, But Not Always Smart
One common route is the flat 10% tax option. This means paying a simple 10% on the full rental amount each month. It’s straightforward—but it comes with a catch: no expenses can be deducted.
That might seem convenient, but it can also mean paying more tax than necessary, especially if rental-related costs are high.
The Smarter Route: Deducting Expenses to Stay Below the Tax-Free Limit
In the case of this landlord, although the total rent collected was ₪7,000 per month, the actual net income—after subtracting eligible expenses—fell below the exemption ceiling.
Net income refers to what’s left after paying for things like:
- Property maintenance and repairs
- Insurance on the apartment
- Property management fees
- Advertising costs
- Legal or accounting expenses related to the rental
By documenting these expenses correctly, the taxable income was reduced to the point where no tax was owed—legally.
Don’t Automatically Pay 10% – Compare All Your Options
Many landlords jump into the 10% tax option without checking whether other methods would save more money.
In Israel, there are three main options:
- Full Exemption – If total rental income is below the ceiling (₪5,650/month), no tax at all.
- 10% Flat Tax – Simple, no deductions, applies to the full rental income amount.
- Standard Taxation with Deductions – Tax is paid based on standard income tax brackets, but expenses can be deducted, which can bring the taxable amount way down—or even eliminate it.
In this case, after properly calculating deductible expenses, the landlord didn’t owe a single shekel—even though the gross income was well over the exemption ceiling.
Key Terms Explained (So Nothing Gets Lost)
- Gross Rental Income: The full amount of rent received before any expenses are subtracted.
- Net Rental Income: The income left after deducting expenses.
- Deductible Expenses: Legitimate property-related costs that reduce taxable income.
- Exemption Ceiling: The maximum monthly income from residential rent that can be earned without paying tax—currently around ₪5,650/month.
- Flat Tax Option (10%): A simplified method where 10% of the total rent is paid in tax, but no deductions are allowed.
- Standard Taxation: Tax paid according to income brackets, but deductions are permitted.
How to Avoid Overpaying on Rental Income
Here’s a quick checklist for landlords in Israel:
✅ Calculate total monthly rental income from all residential apartments
✅ Check if the amount exceeds the exemption ceiling
✅ Keep detailed records of all rental-related expenses
✅ Consider whether the standard taxation route with deductions might reduce or eliminate your tax
✅ Don’t assume the 10% option is automatically the best—it depends on the numbers
Too Long; Didn’t Read (TL;DR)
- One landlord earning ₪7,000/month thought they owed ₪8,400/year in tax.
- After deducting expenses, the net income was below the tax-free limit.
- The 10% tax option is not mandatory—it’s just one of several routes.
- Deducting valid expenses can significantly lower or cancel out your tax bill.
- Always compare the available tax options before paying anything.
Final Thought
Just because a tax rule sounds simple doesn’t mean it’s the right one for every situation. Landlords in Israel have multiple legal options for reporting rental income—and making the right choice can mean keeping thousands of shekels in your pocket.
The lesson? Don’t rush. Run the numbers. Understand your options. Then decide what’s best for your specific situation.
