Quick Answer: Non-residents who earn rental income from Israeli property pay tax to the Israel Tax Authority under one of two tracks: a 10% flat tax on gross rent under Section 122 of the Income Tax Ordinance, or marginal income tax rates on net rent after allowable deductions under Section 121. Monthly rental income below approximately NIS 5,654 (the 2026 threshold) is fully exempt. Most non-residents find Track A simpler, but Track B saves more when mortgage interest and depreciation are substantial. A tax return must be filed annually if income exceeds the exemption.

Tens of thousands of foreign nationals own apartments in Tel Aviv, Jerusalem, Haifa, and other Israeli cities. Some bought them as investments, others inherited them, many purchased decades ago and now rent them out while living abroad. The rental income does not escape Israeli tax simply because the landlord is in London, New York, or Paris. Under the Income Tax Ordinance (Nusach Hadash) 5721-1961, income sourced in Israel is taxable in Israel.

The rules are workable once you understand the two-track system and the exemption threshold. The harder problem is that many foreign landlords — especially those who inherited apartments or rented informally for years — have never filed, and the Israel Tax Authority (ITA) has been cross-referencing Land Registry data with tax records at an accelerating rate. Coming forward voluntarily is cheaper and considerably less stressful than being found.

What follows covers the legal framework, the exemption threshold, both tax tracks with worked examples, filing mechanics, VAT, Bituach Leumi, double taxation treaties, and the 2026 reporting changes affecting new immigrants and long-term foreign owners.

1. The Legal Framework

Israeli tax jurisdiction over non-residents rests on the source principle: income arising from an Israeli source is taxable in Israel. For rental income, the source is the location of the property. A non-resident who rents out an apartment in Tel Aviv is earning Israeli-source income regardless of whether rent is deposited into an Israeli or foreign bank account.

The primary legislation is the Income Tax Ordinance (Nusach Hadash) 5721-1961, specifically:

  • Section 2(6) — defines rental income as taxable income
  • Section 122 — sets out the 10% flat tax election for residential property
  • Section 122A — the partial exemption (shenai) formula for rents that exceed but do not double the exempt amount
  • Section 121 — the standard marginal rate track that applies by default

Non-residents are subject to the same income tax rates as Israeli residents, with one important difference: the minimum rate for a non-resident is 31% under Track B (or the applicable bracket rate, whichever is higher), because non-residents are not entitled to personal tax credits (*nekudot zikui*) that reduce a resident's effective rate in the lower brackets. This makes Track A — the 10% flat option — particularly attractive for foreign landlords whose expenses are modest.

The ITA administers non-resident property tax through its Shuma Zarim (Foreign Residents' Assessments) units, the main one in Tel Aviv. All correspondence on non-resident income goes through these units. They process returns, issue assessments, and audit foreign property owners.

2. The Residential Rental Exemption Threshold

Israeli law provides a complete tax exemption on low-value residential rental income. Under Section 2 read together with the annual ITA adjustment orders, rent charged to an individual tenant living in the apartment as a home is exempt from income tax if the monthly amount does not exceed the sidur shkira patur threshold — the "exempt rental ceiling."

For the 2026 tax year, this threshold is approximately NIS 5,654 per month (the ITA adjusts it each January). Key points:

  • The exemption applies per property, not per landlord. If you own two apartments and each generates NIS 5,000/month, each is separately tested against the threshold.
  • The exemption is only available for residential rental — apartments leased to individuals for residential purposes. Commercial tenants, storage, or short-term rentals do not qualify.
  • You are not required to file a tax return for income that falls entirely within the exemption.

The Partial Exemption (Shenai) Formula

When monthly rent is above the threshold but below twice the threshold (i.e., between NIS 5,654 and approximately NIS 11,308 for 2026), Section 122A phases out the exemption progressively. The taxable amount under this formula is:

Taxable income = (Monthly Rent) − [Exempt Ceiling − (Monthly Rent − Exempt Ceiling)]

Worked example: Monthly rent is NIS 7,000. Exempt ceiling is NIS 5,654.

  • Excess over ceiling: NIS 7,000 − NIS 5,654 = NIS 1,346
  • Reduced exemption: NIS 5,654 − NIS 1,346 = NIS 4,308
  • Taxable amount: NIS 7,000 − NIS 4,308 = NIS 2,692 per month
  • Annual taxable income: NIS 2,692 × 12 = NIS 32,304

Once monthly rent exceeds double the threshold, no exemption applies and the full rental amount is taxable — though the landlord can still elect either Track A or Track B.

3. Track A: The 10% Flat Tax on Gross Rental Income

Section 122 of the Income Tax Ordinance gives residential landlords an election: pay 10% of gross rental income, with no deductions permitted. This is known as the mas meuchad (single-rate tax) or simply "Track A." The ITA added this track specifically to encourage voluntary compliance and simplify obligations for small landlords.

What qualifies for Track A

  • The property must be a residential apartment (*dira le-megurim*) leased to individuals.
  • The tenant must be using it as a home — not a business premises, holiday let, or storage unit.
  • The landlord must be an individual (not a company). Corporate landlords pay standard corporate tax.
  • The election applies per property per year. You can choose Track A for one apartment and Track B for another.

How Track A works in practice

Tax is computed on gross receipts — the rent actually received during the calendar year, without deducting mortgage interest, repairs, management fees, depreciation, or any other expense. The 10% rate applies to the entire gross amount (not just the portion above the exemption, if the shenai formula applies).

Worked example: Monthly rent is NIS 9,000 for 12 months = NIS 108,000 gross income for the year.

  • Track A tax: NIS 108,000 × 10% = NIS 10,800
  • No deductions for the NIS 4,000/month mortgage payment, the NIS 3,500 repair bill, or the property manager's 8% fee.

When Track A makes sense

Track A is the better choice when your allowable deductions under Track B would be small. If the property is fully paid off (no mortgage), if you self-manage, or if your expenses are less than roughly one-third of gross rent, the 10% rate typically produces a lower tax bill than the minimum 31% marginal rate under Track B — even after deducting expenses.

In Practice: Under Section 122 of the Income Tax Ordinance, a non-resident who elects Track A must pay the 10% tax by 31 January of the year following the tax year — either as a voluntary payment (tashlumet mas mirutzit) or through the annual return. The Israel Tax Authority's online payment portal (shaam.gov.il) accepts foreign credit cards and bank transfers. A foreign landlord who paid rent of NIS 120,000 in the 2025 tax year would owe NIS 12,000, due to the ITA by 31 January 2026. Failing to pay by that date triggers a 4% annual Hakamah interest surcharge plus Riv'it Pigurim (default interest), compounding monthly.

4. Track B: Marginal Rates on Net Rental Income

Under Track B — the default track applying Section 121 of the Income Tax Ordinance — rental income is added to the landlord's other Israeli-source income and taxed at progressive marginal rates. The non-resident is first entitled to deduct all allowable expenses directly related to producing the rental income, and then pays tax on the net figure.

Allowable deductions under Track B

  • Depreciation: 2% per year of the building's cost component (land value is not depreciable). On a property purchased for NIS 2,000,000 where land represents 40% of value, the depreciable base is NIS 1,200,000, giving an annual deduction of NIS 24,000.
  • Mortgage interest: The interest portion of mortgage payments on a loan secured against the Israeli property is deductible. Principal repayments are not.
  • Letting agent fees: Typically 8–10% of annual rent; fully deductible.
  • Property management fees: Monthly fees paid to a managing agent are deductible.
  • Repairs and maintenance: Ordinary repairs (painting, plumbing, fixing appliances) are deductible. Capital improvements that increase the property's value are not deductible against income but do reduce the capital gain when the property is sold.
  • Insurance premiums on the property.
  • Accountancy fees for preparing the rental return.

Tax rates for non-residents under Track B

Israel's income tax brackets for 2026 are progressive, rising from 10% on the lowest bracket to 50% on income above approximately NIS 721,560. However, non-residents do not benefit from personal tax credits (*nekudot zikui*) — the credits that, for an Israeli resident, eliminate tax on roughly the first NIS 75,000 of annual income. This means non-residents effectively pay a minimum rate of 31% on taxable rental income.

Track B makes sense when:

  • The property carries a large mortgage and mortgage interest is significant.
  • Depreciation alone (2% × building cost) produces a deduction large enough to bring net income close to zero.
  • Multiple expenses together reduce net income to a fraction of gross rent.

If Track B results in a tax loss (because deductions exceed income), that loss can be carried forward for up to seven years and offset against future Israeli rental income from the same property or against capital gains on its eventual sale — a genuine planning advantage for leveraged investors.

5. Filing Your Annual Return With the ITA

Any non-resident whose rental income from Israeli property exceeds the exemption threshold must file an annual income tax return (*doch mas hachnasa*) with the Israel Tax Authority. The process for a non-resident differs slightly from what an Israeli resident does.

Step 1 — Open a non-resident tax file

If you do not already have an Israeli tax ID number (*mispar mezahe*), your first task is opening a file at the Shuma Zarim (Foreign Residents' Assessments) unit. This requires a certified copy of your passport, proof of property ownership (an extract from the Land Registry — *nesicha mi-tabu*), and a completed Form 5329 (notification of income sources). Israeli lawyers and accountants routinely handle this on behalf of clients who are abroad.

Step 2 — Choose your track and calculate

Decide at the start of each year whether Track A or Track B produces a lower liability. Track A requires minimal documentation — just your total rent receipts for the year. Track B requires gathering and substantiating all expense receipts, bank statements showing mortgage interest, and depreciation calculations.

Step 3 — File the return

The standard filing deadline for individuals is 30 April of the year following the tax year. An Israeli CPA (*roa'h hesbon*) who files electronically on your behalf may obtain a blanket extension to 31 January of the year after the filing deadline (so a return for 2025 income would be due by 31 January 2027 if filed through an accountant with an extension). This extension is not automatic — it must be applied for by the accountant.

Step 4 — Pay

Non-resident landlords are not subject to *miqtza' miqdum* (advance tax payments) the way Israeli businesses are, but they do owe the full tax liability when the return is filed or on 31 January for Track A electors. Interest and penalties accrue from 31 January onwards on any balance not paid by then.

Using a Power of Attorney

Most non-residents handle Israeli tax compliance through a local Israeli accountant holding a yipuy koach (power of attorney) to file returns, receive ITA correspondence, and respond to queries on their behalf. ITA notices arrive in Hebrew, deadlines are hard, and the penalty for non-filing runs NIS 500 per month per return — with criminal referral possible in serious cases.

In Practice: Under Section 131 of the Income Tax Ordinance, every person with Israeli-source rental income above the exempt threshold must file an annual tax return. The Israel Tax Authority's Shuma Zarim unit in Tel Aviv (located at 7 Menachem Begin Road) processes non-resident property files. A new non-resident landlord who has never filed should apply to open a file using Form 5329, which can be submitted remotely by a local CPA holding a POA. Opening a new file typically takes 3–6 weeks; the unit issues a taxpayer reference number and assigns the file to an assessor. First-time filers who come forward voluntarily — rather than waiting to be discovered — are routinely offered reduced penalties by the assessor, and it is common to settle arrears of up to five years without criminal referral where there was no willful concealment.

6. VAT and Bituach Leumi: What Non-Residents Actually Owe

VAT on residential rentals: none

Residential rental income — rent paid by an individual tenant to live in an apartment as their home — is completely exempt from VAT under Schedule B of the Value Added Tax Law 5735-1975. This exemption applies regardless of whether the landlord is a resident or non-resident of Israel. You do not need to register with the VAT Authority (*mas erech musaf*) for residential rentals alone, and you do not charge or collect VAT from residential tenants.

Two important exceptions apply:

  • Short-term rentals (Airbnb, vacation lets, furnished apartments rented for less than 30 days) are treated as hotel-style income. They are not exempt from VAT and trigger different tax rules entirely. See our separate guide on short-term rentals in Israel for foreign owners.
  • Commercial property (offices, retail space, warehouses, parking) is subject to VAT at 17%. Non-residents earning commercial rent must register as a VAT dealer (*esek*) and file regular VAT returns.

Bituach Leumi (National Insurance) contributions

Non-residents owe no Bituach Leumi (National Insurance Institute — NII) contributions on rental income from Israeli property. NII contributions on rental income above the exemption threshold apply only to Israeli residents, who pay 12% on non-employment income above the exemption (split between a reduced and full rate). Non-residents pay only the income tax owed to the ITA.

The one exception: if a non-resident is classified as an Israeli resident for social security purposes (for instance, because they spend long periods in Israel and have a center-of-life argument in their favor), the NII may assess contributions. Residency for NII purposes is tested independently of residency for income tax purposes and depends on physical presence, family ties, and economic links to Israel.

7. Double Taxation Treaties: Claiming Credit at Home

Most countries tax their residents on worldwide income, which means a British or American landlord earning Israeli rental income faces potential taxation in both countries. Double taxation is resolved through a network of bilateral tax treaties (DTTs) and, where no treaty applies, through unilateral foreign tax credit rules.

How DTTs allocate taxing rights over rental income

Under virtually every DTT Israel has signed — including treaties with the United States (1975), United Kingdom, Germany, France, Netherlands, Canada, and Australia — income from immovable property (*nechasim bilti nitaim* in Hebrew) situated in one contracting state may be taxed in that state. This means Israel, as the state where the property is located, has the primary right to tax the rental income.

The landlord's home country then typically grants a credit for the Israeli tax paid, so the landlord pays the higher of the two countries' effective tax rates rather than both in full.

US landlords: the treaty and FBAR considerations

Many American citizens own Israeli property, particularly in Jerusalem. Under Article 6 of the US-Israel Tax Treaty, rental income from Israeli real estate is taxed in Israel. The US citizen declares the Israeli rental income on their federal return and claims a Foreign Tax Credit (Form 1116) for Israeli income tax paid. Because Israeli tax on residential rent is often lower than combined US federal and state rates, a small US top-up may apply.

American landlords should also know that Israeli bank accounts holding rental proceeds may trigger FBAR (FinCEN 114) and FATCA (Form 8938) reporting obligations if aggregate balances exceed USD 10,000 at any point in the year. See our guide on FATCA and FBAR for Americans in Israel for full details.

UK landlords: the Non-Resident Landlord Scheme equivalent

UK residents earning Israeli rental income must declare it to HMRC on a Self Assessment return. The UK-Israel DTT allocates primary taxing rights to Israel on property income. Israeli income tax paid is credited against the UK tax liability under the Foreign Tax Credit Relief rules. UK landlords do not need to apply to any "non-resident landlord scheme" in Israel — the ITA simply expects a direct filing from the landlord or their CPA.

In Practice: Under Article 6 of the US-Israel Tax Treaty (which mirrors the OECD model), a US citizen who owns a Tel Aviv apartment and pays NIS 15,000 in Israeli income tax on their net rental income can claim a dollar-for-dollar foreign tax credit (Form 1116) on their US federal return. To substantiate the credit, the ITA issues a shuma (annual tax assessment notice) following the filed return, typically within 3–6 months of submission. Keep the original Hebrew assessment and a certified translation as proof of Israeli tax paid — HMRC, the IRS, and other foreign tax authorities require documentary evidence before allowing the credit. If the ITA has not issued a formal assessment by the time the home-country return is due, a copy of the paid tax receipt (*kabalat tashlumet*) from the ITA portal generally satisfies foreign tax authorities as provisional proof.

8. The 2026 Reporting Changes: What Non-Residents and New Immigrants Must Know

Two changes in 2026 are worth knowing about if you own Israeli rental property.

Change 1: Mandatory worldwide asset reporting for new immigrants

Since 1 January 2026, individuals who become Israeli tax residents (including Olim making Aliyah) are required to file an opening declaration of all worldwide assets and income with the ITA — even during the 10-year foreign-income tax exemption period that applies to new immigrants under Section 14(a) of the Income Tax Ordinance. This does not change the tax due on foreign rental income during the exemption period, but it creates a mandatory disclosure baseline.

Non-residents who do not become Israeli residents are unaffected by this specific change. The ITA has, however, stepped up cross-referencing of Land Registry records with taxpayer files across the board.

Change 2: Enhanced ITA cross-referencing and enforcement

The ITA's enforcement division now routinely pulls property ownership data from the Land Registry (*Tabu*) and Israel Lands Authority records, matches them against submitted tax returns, and sends automated notices to property owners who appear to have rental income with no corresponding declaration. Foreign owners whose Israeli address or overseas address is on file at the Land Registry have been receiving these notices with increasing frequency since late 2025.

If you receive an ITA inquiry letter (*mikhtav birur*) about your rental income, the clock starts immediately. Respond through an Israeli CPA or attorney within the time stated in the letter (usually 30 days). Failure to respond converts the inquiry into a default assessment, which carries higher penalties and limits your right to appeal.

Practical steps for non-compliant landlords

Foreign landlords who have not filed in prior years have two realistic routes:

  1. Voluntary regularization — come forward through a CPA, disclose the rental history, and negotiate amended returns for the applicable limitation period (seven years under Section 5 of the Limitation Law 5718-1958). The ITA's standard position for non-willful non-filers is to impose the base penalty and interest without criminal referral.
  2. Voluntary Disclosure Procedure (*giluii meidat ratzon*): a formal track that guarantees civil resolution and non-prosecution when the applicant discloses undeclared income proactively before an investigation has commenced. See our guide on Voluntary Disclosure in Israel.