Landlords Pass Israeli Finance Minister's Planned Tax Onto Renters

Tenants, lawyers say rents are being raised, contracts written with escalator clauses.

Raz Smolsky
Raz Smolsky
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There's an increasing presence of illicit money in Israel's real estate industry.
There's an increasing presence of illicit money in Israel's real estate industry.Credit: Nimrod Glickman
Raz Smolsky
Raz Smolsky

Finance Minister Moshe Kahlon’s plan to impose a tax on owners of three or more homes beginning next year, hasn’t won Knesset approval yet and many lawmakers are opposed to the initiative, but Israel’s landlords aren’t waiting to see whether the measure passes.

Tenants report that landlords are already inserting clauses into contracts to pass on the fee's cost.

Dudu Michaeli, 48, has been paying 3,200 shekels ($845) a month for his ground-floor, two-room apartment in Tel Aviv’s trendy Florentine neighborhood since he moved in two years ago.

But his landlord owns 10 apartments, which will make him liable for tens of thousands of shekels in taxes a year from January.

“In August the landlord called me to renew the contract for another year and told me that he’s raising the rent by 300 shekels,” Michaeli said.

“That’s a 10% increase and I was mad. He didn’t give me any advance warning and with just a month till the end of my lease I wasn’t going to be able to find another apartment easily.”

Michaeli tried to negotiate, but his landlord wouldn’t budge.

“He said he had heard they were going to impose a new tax on apartments and he isn’t ready to be flexible. The tax has nothing to do with me, but he said if I’m not happy I can leave.”

Etti Netter, media manager at the National Renters Committee, said, “we have a situation where landlords aren’t paying any tax yet and telling their tenants, ‘I’m not paying a taxes but I’m raising your rent anyhow.’

In other words, the law hasn’t been passed yet and they’re already collecting the tax even though many of them will evade it when it is imposed,” she said.

Backed by a treasury analysis, Kahlon has insisted that the cost of the tax won’t end up being passed on to renters, but as Michaeli’s situation illustrates, tenants don’t have much bargaining power versus landlords.

One way they are fighting back is through the renters' committee which has set up a website where tenants can report about landlords they know have multiple properties and liable for the tax. Netter said the threat of exposure should give renters to room to negotiate.

She cited figures from the Central Bureau of Statistics that estimates how even now some 27% of landlords pay no taxes on rental income, for which they are liable irrespective of the proposed Kahlon tax.

The tax will work out to about a percent of a home’s value, regardless of how much income it generates. Someone who owns the minimum of three properties can choose which property to be taxed for, and the ceiling on payments is 1,500 shekels a month.

Dan Friedman, a lawyer with the Ramat Gan firm Friedman, Younger & Company, said he has been retained twice so far to write contracts with a clause protecting landlords against the cost of any additional tax. These clauses say that the rent will be raised if a new tax or any other government charge is imposed.

Tenants get 30 days notice and the option to leave if they don’t want to pay it.

“There’s nothing to stop the parties to a rental contract to decide that the rent will be subject to updates or supplements,” Friedman said.

“Nevertheless, you can agree to split any extra costs so that the tenant doesn’t have to absorb everything.”

Friedman cited the example of contracts that already specify that rental fees will go up if the value-added tax is raised.

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