Urban renewal rent payments—compensation that developers provide to apartment owners during pinui-binui and TAMA 38/2 projects to cover temporary housing—have long raised questions about their tax status. For years, there was no clear guidance on whether these payments were considered taxable income. As of July 2025, the Israel Tax Authority has officially confirmed that these payments are fully exempt from both Income Tax and Capital Gains Tax. This long-awaited clarification provides significant financial certainty for thousands of homeowners and real estate investors nationwide.
If you own an apartment in Israel and are participating in an urban renewal project—whether pinui-binui (evacuation-rebuild) or TAMA 38/2 demolition and rebuild—you’ve likely been offered urban renewal rent payments from the developer. These payments are meant to cover your temporary housing costs while your apartment is being rebuilt.
For 15 years, there was uncertainty around these payments: Were they considered taxable income? Did homeowners need to report them to the tax authorities? The issue sparked debate among lawyers, tax advisors, and the Israel Tax Authority for over 15 years, without a clear resolution.
That changed in July 2025. The Israel Tax Authority has now confirmed that urban renewal rent payments made by developers to homeowners are fully exempt from both Income Tax and Capital Gains Tax (Mas Shevach). The decision was published in an official Professional Position Paper last week.
Why Was the Tax Status Unclear?
The confusion surrounding real estate taxes stemmed from a contradiction: while the Real Estate Tax Law appeared to exempt urban renewal rent payments, the Income Tax Ordinance did not. Some experts argued that rent paid by developers should be taxed like any other rental income. Others maintained that the exemption under real estate tax law should take precedence. Until now, there was no formal decision, leaving many homeowners and advisors unsure how to proceed.
The Tax Authority’s Final Word
In July 2025, the Tax Authority clarified its position: when homeowners receive rent payments from a developer as part of a pinui-binui or TAMA 38/2 urban renewal deal, those payments are fully exempt from both Capital Gains Tax and Income Tax.
In practical terms:
- You don’t need to report these payments on your annual tax return.
- No tax needs to be withheld or deducted at source.
- You can use the full amount to cover your temporary housing costs during construction.
Who Qualifies for the Exemption?
This exemption applies to all homeowners participating in the project, whether they were living in the apartment or renting it out before the deal. Even if the apartment was an investment property, once the pinui-binui or TAMA 38/2 agreement takes effect and the developer begins paying rent to the owner, those urban renewal rent payments are fully tax-exempt.
It’s important to note that any rental income received before the deal—and reported as part of your regular tax filings—remains taxable under standard rules. This clarification is particularly beneficial for real estate investors, many of whom participate in urban renewal projects as non-resident landlords.
Added by Buyitinisrael:
How Urban Renewal Rent Payments Are Calculated
In most projects, the developer pays each apartment owner a fixed monthly amount to cover temporary rent. These payments typically reflect the market rate for a comparable apartment in the same area. Payments begin when the homeowner vacates their apartment and continue until the rebuilt unit is delivered. Legally, these payments are considered part of the overall compensation package the developer provides in exchange for acquiring the homeowner’s property rights.
Why This Matters to Homeowners
The Israel Tax Authority’s decision resolves a longstanding gray area and offers financial certainty to thousands of apartment owners participating in urban renewal projects across the country.
For those considering participation in an urban renewal project, this tax exemption brings welcome clarity. Knowing that urban renewal rent payments are tax-free eliminates the need to budget for taxes on those amounts or worry about complicated reporting requirements. It also makes the deal more attractive, offering homeowners peace of mind and greater financial predictability during what can be a disruptive transition period.
Adv. Aharon Tzidmadia (CPA) is a leading expert in Israeli real estate taxation. A former senior inspector and department head at the Israel Tax Authority, he specialized in real estate and contractor taxation, BOT/PFI projects, and professional rulings. Since 2015, he runs a private law practice focused on real estate tax, and regularly lectures at universities and professional forums. Aharon holds CPA and law licenses and serves as a major in the Israeli Air Force reserves. For enquiries: http://www.atz-law.co.il/
