Tenants Fear New Home Tax in Israel Will Raise Rents

New treasury proposal would impose flat tax on owners of multiple rental properties.

Apartment buildings under construction in Netanya (archives).
Ofer Vaknin

Days after the Finance Ministry unveiled a plan to heavily tax owners of three or more rental properties, lawmakers and tenant activists warned that it would lead to higher rents for many of the two million Israelis who live in rented housing.

“The higher tax on landlords will get passed on to renters. Instead of achieving its laudable goal of lowering housing costs, it will do exactly the opposite,” said MK Stav Shaffir, who rose to fame by pitching a tent on Tel Aviv’s Rothschild Boulevard, sparking the 2011 social protests.

She said the treasury should adopt her proposal of tax breaks for landlords who rent out an apartment for at least five years without raising the rent.

The treasury plan, which was released on Thursday, imposes an annual tax of 10,000 shekels ($2,500) on owners of three residential rental properties. The sum rises to 22,000 shekels for four properties and 262,000 shekels on 20. The tax will be part of the Economic Arrangements Bill for 2017-18 and go into effect next year.

The aim of the tax isn’t to raise revenue, which the treasury doesn’t need — it also proposed cuts to individual and corporate income tax next year. It’s to discourage investment in residential real estate, where rental income is largely untaxed.

Finance Minister Moshe Kahlon hopes it will push investors out of the housing market, where they compete with people trying to buy a home to live in, and alleviate pressure on the housing market where prices have been soaring despite his efforts to rein them in.

“When a young couple wants to buy their first home and an investor who already owns two or three homes is competing with them ... we’re giving an edge to a first-time buyer and making it more difficult for the investors,” said a treasury official who asked not to be identified.

But Yuval Shtalrid, who runs the Apartment Renters Committee, said Kahlon and the treasury had erred in designing the tax.

“The finance minister has been stressing the ability to buy a house and not addressing the rental market,” he said, pointing to Kahlon’s failure to support a rent-control law while pushing hard the Mahir LemMishtaken program aimed at offering some reduced-price homes.

“I’m not sure someone who owns four or five apartments will sell them. Maybe some will, but not a critical mass of investors,” Shtalrid said.

Treasury officials disagree. Sources at the ministry said only 80,000, or 13%, of Israel’s 600,000 rental homes were owned by people with three or more properties. With the rest unaffected by the new tax, the minority won’t be able to pass along the cost of the tax onto tenants, they said.

Yariv Paz, CEO of Paz Group Fund, which invests in real estate in Israel and the United States, said he would try to pass on the tax to tenants, though admitted he would likely be only partially successful.

Paz faulted the proposal for imposing a flat tax without regard to the value of the properties and predicted that it will cause investors to sell homes at the lower end of the housing market.

“It’s doesn’t make sense that some who owns three private houses in Herzilya Pituah that bring in 100,000 shekels a month will pay a tax of 1,000 shekels a month and be left with 99,000 shekels, while someone with three apartments in Haifa that bring in 6,000 shekels will pay the same tax,” he said.