Tax Authority closing in on rental tax evaders

Tens of thousands of properties damaged by Iranian missiles have created an exceptional test case for the interface between the public and the state authorities. Some apartment owners have applied to the state for compensation, and in return can shortly expect to receive tax demands, even retroactive ones. “In towers that were hit in the center of the country, people came along and said ‘We rent out an apartment here for NIS 18,000 monthly and seek compensation for the loss of rent,’” says a senior Ministry of Finance official. “That way, we discovered rental apartments that were previously unknown to the Tax Authority.”

It would appear that the Ministry of Finance has given up on its attempts to legislate a reporting obligation for home owners on rental income. Bills of this kind have been put forward in the Knesset Finance Committee in recent years, only to be blocked time after time by the objections of members of Knesset, and in particular by outgoing Knesset Finance Committee chairperson Moshe Gafni. Last year, Minister of Finance Bezalel Smotrich reached understandings with Gafni on promoting the legislation, but, according to him, Gafni reneged on their agreement.

Since then, the Ministry of Finance has sought, and found, ways of reaching the same goal, without resort to the Finance Committee.

Route one: Bypassing the Finance Committee

The first way is a route bypassing the Finance Committee. The Ministry of Finance has difficulty in estimating how much tax is denied to the state as a result of failure to report rents above the exempt amount (NIS 5,654 monthly), but it is clear to everyone that it amounts to tens and even hundreds of millions of shekels every year.

But instead of mandatory reporting, which has to go via the Finance Committee, the Ministry of Finance instituted an alternative of “advancing digital tools.” The Ministry of Finance and the Tax Authority have been working for a long time on interfaces connecting different databases and cross-checking information in order to reach people who own at least two homes. This is on the basis of home sales data at the Tax Authority and information from the Tabu (Land Registry) at the Ministry of Justice.

“We’re closing in on tax evaders in the rental market even without legislation,” says a senior Tax Authority source. “We no longer wait for people to volunteer to report, and we’re reaching all the information by ourselves, cross-checking, and finding those who don’t report. We’re suddenly seeing the real rental market much better.”

Route two: Attaching leases to tax returns

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The change in approach to active enforcement instead of a passive mechanism that relies on reporting by the public is being accompanied by complementary measures. This route came about recently almost under the radar, as part of the upgrading of online reporting to the Tax Authority.

In the framework of the technological upgrade, the Tax Authority started to introduce a new requirement from owners of rented homes who choose the 10% taxation track for rental income, i.e., payment of just 10% on the rent, but without deduction of expenses. Since January, the Tax Authority has required these landlords to attach the lease to their report. Previously, even with online reporting and payment of tax debts, the Tax Authority sufficed with declarations of income only, and did not require the lease to be attached.

The 10% tax can be paid in one annual sum no later than January 31 of the year following the year in which the rent was received. After this date, the amount due is subject to interest and linkage under the law. From this year, even someone who reports rental income in their annual report for 2024 (submitted during 2025), and pays tax at their marginal rate on the rent, but after deduction of expenses, will be required to file the lease, and not just those who choose the 10% track.

In this way, the Tax Authority sees the true amount that changes hands between tenants and landlords, and can build up a pool of leases than can form the basis of comparison and cross-checking of information on other rental properties in the same area, and expose landlords who report and file fictitious leases.

Route three: Financial profiling

Alongside these initiatives, which are unique to tax evasion in real estate, a plan is currently being formulated and advanced that aims to reveal to the Tax Authority all the property of taxpayers in Israel, including rented properties: the plan for drawing up a financial profile of every citizen of the country.

In May this year, Israel Tax Authority director Shay Aharonovitz disclosed that the Authority was acting to create a financial profile of every citizen using technological means and cross-checking of data across all the databases in the state’s possession. The profiling process will take place at the same time as the upgrading of the Tax Authority’s computer systems and the integration of advanced artificial intelligence that will be capable of classifying reports according to level of risk, identifying suspicious behavior, and warning in real time of gaps between reported and actual income.

The process is due to reach a peak in 2027, when letters will be sent to every citizen in Israel containing the financial profile created by the Tax Authority, on which citizens will sign. The report will be scanned into the Tax Authority’s systems, and will be cross-checked against information that it holds.

“We already know how much a person earns, whether he or she is salaried or self-employed, about their property, and in general we have a very good picture of most citizens of the State of Israel,” says the senior Tax Authority source. “The information, however, is dispersed among very many systems that, until recently, were not interfaced. Now we are feeding everything into one data pool.”

Information from other government bodies is also input into this pool, “such as information from Tabu on real estate assets, from the Population and Immigration Authority, and other places. AI tools that we have developed will help us to pick out discrepancies immediately, such as whether a taxpayer’s reports of income over the years match their assets minus their liabilities, or whether there’s a mismatch. Do real estate assets worth millions not yield any significant income?”

Published by Globes, Israel business news – en.globes.co.il – on July 28, 2025.

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