How Much Income from Apartment Rentals Will Be Considered a Business? / Ohad Shpak
Last week, the Israeli Tax Authority published its position on the number of apartments the rental income of which would be considered income from a business and would require payment of income tax .
This position specifies that income from the rental of 10 apartments or more will be considered income from a business – that is, would be liable to income tax according to the taxpayer’s income levels – the person receiving the income from the rental of the apartments. In addition, the Tax Authority assumes that receipt of income from the rental of five or less apartments shall be considered passive income, i.e., non-business income, requiring payment of tax in accordance with the amount of the rental, but regardless of the taxpayer’s total income.
As for the rental of more than five residential apartments, but less than 10 apartments, the income will be examined in accordance with various tests, such as the quality of the residential apartments, the manner of financing their purchase, period of time the real estate assets have been in the person’s possession, expertness in carrying out the transactions, frequency of transactions, or operations, financial scope of the transactions, the entrepreneurial test (i.e., of the apartments’ improvement and their marketing), and what the Tax Authority defines as the “supreme test” – examining the specific circumstances. The Tax Authority will use this test to examine every relevant circumstance that may help it distinguish between business and passive income.
According to the Tax Authority, 3,517 persons in Israel own at least five apartments and 401 persons hold more than ten apartments each. According to the figures, 6,120 persons in Israel own between 5 and 10 apartments.
The Tax Authority determines that when income is produced in a systematic and frequent manner, and direct connection can be established between the income and the personal income and the human capital of the person generating the income (or its representatives), and when a system or system activity is required to operate the rental, this is significant indication that a business of apartment rentals exists and this will require payment of income tax.
Until now, the Tax Authority has refrained from establishing a clear number of apartments on this issue, which has led to many appeals to the courts, the most prominent being of the businessman, and one of the richest lawyers in Israel, Shraga Biran. In the case of Biran, who owned 24 apartments, the District Court ruled that this was not a business, but the Supreme Court recently reversed its decision and ruled that the income received by Biran from these rentals should be regarded as income from a business requiring payment of income tax. The Tax Authority’s position reflects the court’s decision in the Shraga Biran case.