Income tax deduction for rent paid by tenants

In 2023, it was established for the first time that someone who rents out an apartment for an amount that requires tax payment and simultaneously rents an apartment, will be able to offset the rent they receive with the rent they pay, thereby saving significant tax payments in some cases. This is particularly important, for example, for someone whose parents rent out their apartment and simultaneously rent an apartment in assisted living.

Who has to pay income tax on rent they receive?

Anyone who receives rent above the ceiling from one apartment or several apartments combined must pay tax on rental income. In 2023, the tax exemption ceiling for rental income is 65,650 shekels per year or 5,470 shekels per month. The calculation is annual. For example, if for 10 months you received rent of 6,000 shekels and then the apartment was vacant for two months, the annual income is 60,000 shekels and there is no tax liability.

Assuming you are liable for tax, meaning the rent you received is higher than 65,650 In shekels, there are three options for calculating the payment. The simplest option is to use the 10% formula based on the rent; for example, for an annual rent of 70,000 shekels, the tax is 7,000 shekels. The tax must be paid through the Tax Authority’s website within 30 days after the end of the year. In this article, I will not discuss the other two options, but I will note that sometimes, even if you received rent above the threshold, choosing a different option may result in a tax payment of less than 10%. It is advisable to consult with an accountant or tax advisor.

For our purposes, only the payment method under 10% is relevant, because it is the only one that allows us to offset the rent we pay.

Who is entitled to offset rent they pay against rent they receive?

An individual who owns only one apartment that is rented out for residential purposes and who, at the same time, rents an apartment or a unit in assisted living, a nursing home, or a geriatric hospital. Rental expenses may be deducted from rental income only from rental income taxed under the 10% method. An additional condition is that the lease agreements must not be with relatives.

How will the rent be calculated for those who rent and are rented to?

Let's assume a person receives rental income of 80,000 shekels per year (6866 per month) and pays rent of 85,000 shekels per year. Until now, this person owed 8,000 shekels in taxes per year. Now, before calculating income, the expense is deducted, and effectively, this person has no profit from rent and no tax payment. If that person receives 80,000 and pays 60,000 per year, meaning the net income is 20,000 shekels. This amount is below the exemption ceiling of 65,650 (as of 2023), therefore there is no tax payment.

The maximum rent expenses deductible are 90,000 NIS per year – 7500 per month.

Warning

The article is for general knowledge only. It is recommended to consult with an accountant or tax advisor. This is especially important for self-employed individuals who use part of their residential apartment as an office and deduct a portion of the rent they pay from their business profits. Business owners already have an accountant who helps them file their annual report. Here is some additional food for thought for them.