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New incentives for long-term rentals could be a game-changer

Finance Ministry says changes would give tenants security and provide a more economically viable rental market for entrepreneurs

New residential buildings in the coastal city of Netanya, March 26, 2020. (Gili Yaari / Flash90)
New residential buildings in the coastal city of Netanya, March 26, 2020. (Gili Yaari / Flash90)

The Finance Ministry said this week that it is setting out a new framework to incentivize developers to launch projects for more long-term rental apartment units.

Just under a third of Israel’s population live in rental apartments, in a market crowded by private landlords and where many leases are signed for just a year, leading to little security for tenants.

According to new regulations, significant tax breaks will be used to encourage developers of residential building projects to set aside a part of the development for long-term rentals — for between 10-15 years.

To qualify, at least two-thirds of the apartments — or a minimum of 10 (whichever is higher) need to be made available to rent for at least 15 years. Tenants will be entitled to a lease for at least 10, and the rental contract will place limits on the increases in rent permissible through the period.

This addresses another of the key problems in the current rental sector — the unpredictability of rent rises on an annual basis.

The framework is designed to ensure that the tax incentives grow the longer the property is rented out. For the first five years, the leasing company will pay a discounted corporation tax of 11% in place of the current rate of 23%. Between five and ten years, corporation tax will be reduced to 9%. And between ten and 15 years, the tax will be set at 7%. If an apartment is rented for up to 20 years or more, the tax of just 5% will be due.

These are big reductions and are intended to encourage the establishment of long-term rental businesses so that a housing project can be sold in its entirety to a company focused on managing it for tenants.

This approach has been used in other OECD countries and has proven successful in making building for the rental market economically viable, the Finance Ministry said.

The ministry said it believes tens of thousands of apartments for long-term rental can be delivered through this project, across the country. To date, existing incentives to encourage long-term rental apartments have delivered permits for around 10,000 units as part of mixed schemes, which include reserved apartments for rent rather than sale.

Finance Minister Avigdor Lieberman said the move represented a double success “that will provide tenants [with] confidence and security to rent an apartment long-term…[and] will make long-term renting in Israel viable for entrepreneurs.”

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