Holiday apartments

With Israel’s property market heating up and prices continuing to rise, buyers are seeking worthwhile investment alternatives. Recently, we have therefore seen a fashionable and growing market in “holiday apartments” and apartments for short-term letting. Both forms of investment offer numerous advantages and excellent profit opportunities, but they also raise a “hot” issue in tax law. Adv. Uri Shiloh, a property specialist and partner at E. Shiloh & Co., and Adv. (CPA) Miki Michaelovitch, a tax specialist at Dr. M. Druker & Co., have compiled the following questions and answers.

What is a holiday apartment, and how does it differ from an ordinary apartment?
First, these are not the holiday units sold during the 1990s under timeshare arrangements in club hotels in Eilat, Tiberias and abroad, which entitled purchasers to a fixed holiday week each year. Rather, these are residential apartments whose rights will be registered in the purchaser’s name after purchase and which will belong exclusively to the purchaser.
Most holiday apartments are located in “apartment hotels”, luxury hotels or quality tourism developments, rather than ordinary residential buildings. The idea is for owners to use the apartment during holidays and visits to Israel, while letting it to tourists at other times as an income-producing asset. On 26 February 2013, the Ministry of Tourism issued a directive requiring apartments in hotels to be let through the hotel’s management company, to supervise compliance with the requirement that apartments be available to the holidaying public for at least six months each year.
Since every building and apartment is constructed under a building permit, the property’s permitted purpose must be examined. If it is designated for hotel use, neither the owner nor a tenant may live there throughout the year; it must be let for hotel purposes for at least six months annually. If it is designated for residential use, it may be let as accommodation for guests on a short-term basis. However, an owner with several apartments should consult a planning and building specialist and a tax specialist about whether the letting activity constitutes commercial activity and a change of use from residential to hotel accommodation. Use beyond that permitted may constitute an offence under the Planning and Building Law.
What is a short-term rental apartment?
A short-term letting may range from a few days to several months. In recent years, Israel’s short-term apartment rental market, or subletting, has gained considerable momentum, partly because of high hotel prices and strong demand during peak tourist seasons. Unlike an ordinary apartment let to one tenant for at least a year, this is an apartment let to many tenants for short periods throughout the year. A general calculation shows that although short-term letting involves more work for the landlord, its potential return is much higher. Companies and intermediary websites can also almost entirely remove owners’ involvement in letting and finding tenants.
Who usually manages and maintains short-term rental and holiday apartments?
When owners are not living in the property, the apartments are maintained and managed by the hotel, in the case of holiday apartments, or a maintenance company, in the case of short-term rentals. This prevents neglect and keeps them usable throughout the year. Unlike owners of ordinary apartments who visit once a year without knowing what condition they will find, owners of holiday or short-term rental apartments can feel reassured that their property is cared for and ready whenever they want it. Nevertheless, they should establish in advance the standard of maintenance provided by the company or apartment hotel and whether the company is reputable.
For whom are holiday and rental apartments a particularly worthwhile investment?
Buying a holiday or short-term rental apartment is especially worthwhile, for example, for foreign residents who regularly come to Israel for holidays lasting weeks or months. It may also be worthwhile for international companies that send representatives to Israel for periods of a month or more each year. Buying an apartment benefits them because they can stay there during their visits and save high hotel costs. When they are abroad, the apartment can be let to tourists and generate income rather than stand empty and unproductive. Many investors apparently also find it worthwhile to rent an apartment long-term, furnish and equip it, and then let it short-term to tourists and businesspeople.
What are the advantages of holiday apartments and short-term rental apartments?
First, both types can serve their owners as accommodation and as rental property. When owners come to Israel, they need not find and pay for a hotel because they can stay in their apartment. When the apartments are not in personal use, they will be maintained throughout the year. Unlike ordinary apartments that sometimes stand vacant, sound management can maximise the economic potential of holiday and short-term rental apartments all year round, including when owners are not using them. Owners staying in holiday apartments also enjoy the hotel’s services, including a gym, swimming pool, housekeeping and more.
How much can the owner of a holiday or short-term rental apartment expect to earn?
The average monthly rent for a short-term rental apartment can be three times the ordinary rent, or even substantially higher. The price depends on location, proximity to the sea and entertainment centres, size and standard of furnishings. We found holiday apartments for couples during Passover 2013 at USD 250 per night, and summer holiday prices ranging from USD 115 to USD 300 per night. Holiday apartments are a relatively new trend, so payments to owners are not uniform. There are several calculation methods: some hotels pay according to the days the particular apartment was actually let to tourists, while others calculate the owner’s payment from the average overall revenue of the hotel or its pool of hotel apartments. To make the transaction as worthwhile as possible, consult an experienced property lawyer.
Is holiday-apartment rental taxed in the same way as residential-apartment rental?
The following highlights several tax issues and does not constitute a legal opinion. Before buying a holiday apartment, it is advisable to consult a tax specialist.
The Tax Authority issued a circular on property-tax aspects of holiday apartments, determining that they are not “residential apartments”. This determination relies on the purpose of planning and building laws, which should not facilitate unauthorised uses, and tax laws, under which holiday apartments are intended for short and occasional stays rather than permanent residence as the occupant’s home base. Amendment 34 to the Real Estate Taxation Law provides that land appreciation tax exemptions apply to a qualifying residential apartment: one that is residential by its nature and has actually been used for permanent residence. Accordingly, these exemptions will not apply to sales of holiday apartments. Exceptions are holiday apartments in projects carried out before Amendment 34, published on 28 February 1997. Land appreciation tax exemption, but not purchase-tax exemption, applies to these because purchasers relied on the former legal position.
Bear in mind that the income generated by a holiday-apartment owner is subject to income tax as income from real property. The landlord’s marginal tax rates and loss-offsetting rules apply, taking into account that this is not income from personal exertion. Moreover, an owner with several holiday apartments may face the argument that the activity constitutes a letting “business”, requiring bookkeeping and annual tax returns.