Israeli Tax Authority Sets Its Sights on Airbnb

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The Airbnb phone app. Credit: Bloomberg

The Israel Tax Authority is targeting homeowners who rent out their properties to tourists, after finding that more than 30 percent of them had not reported their income from short-term leases.

As part of a broadly based effort to combat tax evasion and black market capital, the authority has been conducting snap audits in Tel Aviv, Jerusalem, Haifa and Eilat of short-term lessors, many of whom work through Airbnb — the web-based service that pairs homeowners and short-term tenants.

Most homeowners who failed to report their rental income to the authority claimed they didn’t know they had to.

It’s possible, however, that a change is afoot in the short-term rental market. The Tourism Ministry is currently considering suggesting a plan to the Tax Authority that would have short-term lessors pay a 35 percent tax rate. This would be collected via apartment rental firms such as Airbnb. There is also a proposal that would impose a flat 400-shekel ($106) monthly fee on lessors.

In recent years, the short-term rental market has blossomed in Israel. Although this activity is entirely public on the internet, the homeowners’ income is sometimes not reported, or not accurately reported, to the Tax Authority.

Airbnb pairs landlords and short-term renters in more than 190 countries. The authorities in New York, Berlin and Barcelona have already openly come out against Airbnb for permitting properties to be rented contrary to building regulations and local bylaws. In Berlin, landlords must obtain a special municipal permit to rent via Airbnb, with violators facing fines of more than 100,000 euros ($110,000).

Last year in Tel Aviv alone, there were more than 6,500 short-term rentals (including sublets), while countrywide the figure was more than 10,000, the Tourism Ministry reported. Short-term leases can run from a few days to a few months.

Until new regulations come into force to clarify the situation, it’s important that homeowners verify that they can rent out their properties without running afoul of the terms of building permits.

They should also check various taxation options and consider tax benefits available to those leasing residential property on a long-term basis. It’s also worth comparing the tax take on vacation rentals — where revenue is fully taxed — and the option of a flat 10 percent rate if the property is rented for residential use and not to a business.

Homeowners whose facilities are being used for commercial purposes must disclose the business activity and pay income tax in full (as well as VAT and municipal tax). The law on taxation of residential rentals provides an exemption on rental income of up to 5,030 shekels (as of this year). The exemption does not include rentals or sublets for commercial purposes.

A year ago, the Israel Hotel Association approached Tel Aviv Mayor Ron Huldai, asking that the tourist rental market in the city be regulated. Such regulation could generate as much as 175 million shekels in taxes for the city.

It has been claimed that short-term rentals not only harm the hotel sector — where millions are invested in business development — but also make it more expensive for tenants who are looking for long-term rentals, because the short-term rental business removes some properties from the long-term rental market.

Only time will tell if a new tax on short-term rentals will curb activity in the sector.

The writer is one of the founding partners of the E. Shiloh & Co. law firm.

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