Owners of buildings designated for long-term rentals are entitled to significant tax benefits that are being granted in order to encourage the construction of buildings that include residential apartments earmarked for long-term rentals.
In 2021, chapter seven 1 of the Encouragement of Capital Investments Law was amended to introduce a new tax benefit track for long-term rental apartments. The Israel Tax Authority (“ITA”) recently published two circulars addressing this issue: circular 4/2025, which discussed the old track in effect prior to the amendment; and circular 5/2025, which discusses the new track.
The new track’s eligibility criteria according to the ITA’s circular
- The new track is available for a defined period – the new track applies to buildings for institutional rental in relation to which applications for approvals of plans (accompanied by building permits) are submitted to the Investment and Development Authority for Industry and the Economy by December 31, 2031, and before construction is completed.
- The definition of “building for institutional rentals” – the definition means a building in which at least six apartments, if it is located in a peripheral region, or 10 apartments if it is located in a non-peripheral region, are rented out for a minimum lease term of 15 years during the 18 years after construction was completed (“the Lease Term”).
- The party entitled to the tax benefits – in principle, the tax benefits are granted to the developer who constructs the building or to the party who purchases the building rights from the developer (“the Successor Lessor”) under particular conditions specified below. The developer of the building or the Successor Lessor can be an individual, a company, a cooperative society or a partnership.
Tax benefits
The principal benefits are reduced tax rates on taxable income from sales and rentals of apartments in a building for institutional rentals. The longer the Lease Term, the lower are the tax rates, with the maximum and minimum tax rates being 29%-24% for an individual, or 11%-5% for a company.
Additional new benefits are: accelerated depreciation of 20% per year; a reduced 20% tax rate on dividends from taxable income generated from the sale or rental of apartments in a building for institutional rentals; a 0.5% purchase tax benefit to a Successor Lessor, subject to particular restrictions; a VAT exemption on apartments rented out and on sales of apartments that were leased for a minimum of five years. There are various restrictions on offsetting the VAT paid on the land and on other components, such as construction costs.
Apartment sales
The law allows the apartments to be sold even prior to the expiry of the Lease Term, provided that at least five years of rental have been completed out of the first six years of the Lease Term, which is counted from the construction completion date if the seller is the developer or, if the seller is the Successor Lessor, from the date of purchase.
Restrictions on the tenants’ identities
Tenants must be individuals and their families, and renting out to corporations is not allowed, apart for (from?) the exceptions allowed in the wake of the Swords of Iron War relating to housing of evacuees, etc.
The dream that evaporated: drastic drop in the number of applications
Ostensibly, the new track offers significant tax benefits designed to incentivize entrepreneurs to enter the long-term rental market and increase the inventory of rental apartments in the market. In practice, however, since the new track was created by legislative amendment, the number of plan approval applications submitted to the Investment Authority has dropped drastically. One of the main reasons for this phenomenon, is the lengthening of the Lease Term to 15 years instead of 5 years according to the new track, ; the hike in the interest rate in the economy has not helped matters. These factors actually serve to de-incentivize developers from engaging in long-term rental housing projects.
The clarifications published by the ITA are important, but it seems that far more is needed in order to motivate developers to take on projects of this type, in order to fulfill the legislative amendment’s important purpose – to create certainty, economic security and decent housing for the growing population of Israelis who cannot afford to purchase an apartment.
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