Tax & Finance

Can a non-resident deduct depreciation from Israeli rental income, and what happens when the property is sold?

Q: Can a non-resident deduct depreciation from Israeli rental income, and what happens when the property is sold?

It depends entirely on which rental tax track you chose. On the marginal-rate track you may deduct depreciation on the building, conventionally 2 percent a year of the structure's value excluding land. On the flat 10 percent track under Section 122 of the Income Tax Ordinance you may deduct nothing at all, depreciation included. The trap sits at the exit: Section 122(c) treats depreciation as though it had been deducted when betterment tax is calculated, so a landlord on the 10 percent track forgoes the deduction during ownership and still has the purchase price reduced by it on sale.

      It depends entirely on which rental tax track you chose. On the marginal-rate track you may deduct depreciation on the building, conventionally 2 percent a year of the structure's value excluding land. On the flat 10 percent track under Section 122 of the Income Tax Ordinance you may deduct nothing at all, depreciation included. The trap sits at the exit: Section 122(c) treats depreciation as though it had been deducted when betterment tax is calculated, so a landlord on the 10 percent track forgoes the deduction during ownership and still has the purchase price reduced by it on sale.
    

Israel gives non-resident landlords of residential property a choice of tracks. The 10 percent track applies a flat tax to gross rent, allows no deductions, and in many cases spares the owner a full annual return. The marginal track taxes net profit at ordinary rates and permits deductions for mortgage interest, repairs, agent fees, insurance and depreciation. Depreciation is claimed under the Income Tax Ordinance and the depreciation regulations, and it attaches only to the structure, so the land component of the purchase price has to be stripped out of the base. Commercial property is taxed under different rules again.

Most non-residents pick the 10 percent track because it is simple, then meet the cost years later. On sale, betterment tax is computed on the difference between the sale price and the adjusted original cost, and that cost is reduced by depreciation deemed taken whether or not it was ever claimed. Across fifteen or twenty years of ownership the effect on the taxable gain is substantial. The comparison worth making is before the first tenant moves in rather than at closing, and it turns mainly on mortgage interest and the expected holding period. Keep every invoice, because assessors will not accept a depreciation base built on estimates, and the deemed figure flows straight into the betterment tax computation.

⚖ In Practice

Governing law: Section 122, Income Tax Ordinance [New Version] (the 10 percent residential rental track, no deductions, depreciation deemed taken on sale); depreciation itself under the Income Tax Regulations (Depreciation)
Competent authority: Israel Tax Authority (Rashut HaMisim); betterment tax handled by the Land Taxation Office (Misrad Misui Mekarke'in)
Depreciation rate: conventionally 2 percent a year on the building component of a residential property; land is never depreciable
Tracks available: flat 10 percent of gross rent, or marginal rates on net profit with full deductions; the election is made annually
Deadline: tax on the 10 percent track falls due within 30 days of the end of the tax year in which the rent was received

From the full guide: Rental Income Tax in Israel for Non-Residents: A Complete Guide

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Can a non-resident deduct depreciation from Israeli rental income, and what happens when the property is sold?

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