Major changes to Israeli real estate taxes and how they affect you

Any foreign resident thinking of selling or purchasing a residential property in Israel in the near future must be aware of the major changes to the tax code enacted in the 2013 Budget: purchase tax rates are now higher, most foreigners will have to start paying capital gains tax on the sale of a residential property commencing January 1st 2014 and the capital gains tax rates in the future will depend on date the property is purchased.



Capital Gains Tax (Mas Shevach):

 
Until recently there were a number of exemptions to capital gains tax on the sale of a residential property in Israel, the most well known example being “once every four years” i.e. irrespective of how many properties you own or how long you have possessed each one you could sell one residential property every four years with a full exemption from capital gains tax.

Under the latest change in the law this exemption will still apply for all individual sellers of residential properties until December 31st 2013. From January 1st 2014 the following requirements will need to be met in order to be exempt from capital gains tax on the sale of a residential property:

1. The property is being sold by either an Israeli resident or alternatively a foreign resident who can provide a confirmation from the tax authority of his country of residence that he does not own any residential property in his country of residence. Most country’s tax authorities will probably not be able to provide confirmation of this kind, despite that this is the legal requirement of the Israeli authorities in order to avail oneself of the exemption if you are a foreign resident.

2. It is the seller’s sole residential property in Israel. From January 1st 2014 even an Israeli resident who owns more than one residential property is no longer exempt from capital gains tax.

3. On January 1st 2014 the seller did not own more than one residential property in Israel. Ownership of no more than 33% of a different residential property will not affect this exemption right.

4. The seller has owned the property being sold for more than 18 months as a residential property and not for other purposes.

5. The seller owns at least one third of the residential property being sold.

6. The seller has not sold in the previous 18 months another property under this exemption.

7. The seller is not selling or gifting the property to a family member.

8. The exemption is only on the first 4.5m shekels of the sale price.

If the seller has purchased one other residential property within the 18 months prior to the sale of this one, then the seller can still be considered as an owner of one property.

Any seller not entitled to the exemption as delineated above will be required to pay capital gains tax on the sale. The taxable amount of capital gains is calculated by deducting the appreciated value of the purchase price from the sale price. This is done by linking the purchase price to the inflation rate to obtain the appreciated value of the purchase price on the day of the sale. There are certain deductions allowed for expenses relating to the purchase and improvements of the property provided receipts are submitted as proof.

The law imposes capital gains tax at a rate of 25% commencing January 1st 2014 in most instances that do not fall within the conditions of the full exemption as listed above. To calculate the tax payable one adds up the number of days between the purchase date and the sale date and then calculates the proportion represented by the period starting January 1st 2014 by dividing the number of days from January 1st 2014 until the sale date from the total number of days between the purchase and sale dates. The seller must pay a tax of 25% of that share of the total real increase in value between the appreciated purchase price and sale price. There is however an additional tax on inflationary capital gains until January 1993 for properties purchased before 1993 which is too complicated to discuss here but must be examined before coming to any final determination.

There are limitations on using the exemption from Capital Gains Tax for the time period of ownership until January 1st 2014:

1. It is limited to the first two residential properties sold.

2. For at least one of the two properties sold the seller had to be entitled to an exemption from capital gains tax under the previous version of the law (i.e. either not having sold a residential property using an exemption in the previous four years or one of the other exemptions).


Case Study:

A foreign resident who also owns an apartment in her home country purchased an apartment in Israel for 2,000,000 shekels on January 1st 2012. She sells the apartment on March 1st 2014 for 2,500,000 shekels. Let’s assume the inflation rate increased a total of 5% between the purchase and the sale dates.
The purchase price linked to inflation is therefore 2,100,000 shekels; giving a total capital gain of the real increase in value between the appreciated purchase price and the sale price of 400,000 shekels (we are ignoring for our purposes any allowable deductions).
Since there are 791 days in total between the purchase and the sale dates, of which 60 were from January 1st 2014, the taxable period for capital gains which starts January 1st 2014 is 60/791 of the total real increase in value over the whole period of 400,000 shekels = 30,341 shekels of taxable Capital Gains. She would have pay a tax rate of 25% on the taxable capital gains which is a tax payment of 7,585 shekels.

It can be seen from the above that the longer she waits to sell after January 1st 2014 the higher the share of the taxable capital gains period will be and therefore increase the actual tax to be paid. The purpose of this change in the tax code is to encourage foreign owners and Israeli residents who own more than one residential property to sell their properties. The expectation is that with the increased supply of created, property prices should decline.

Any residential properties purchased after January 1st 2014 that are not fully exempt as above will have to pay the 25% tax rate on the entire period of ownership.

There are special rules for gifts and properties received by way of inheritance that we will deal with in a separate article.

 


Purchase Tax (Mas Rechisha):

 

With the intention of dissuading foreign buyers and investors from purchasing apartments, especially luxury ones, the government raised the purchase tax rates significantly and added new brackets for high-end properties. Any purchase after August 1st 2013 by someone who is not considered an Israeli resident as far as the Israeli tax authorities is concerned must pay the higher rates below, even if it is their sole residential property. A buyer claiming to be an Israeli resident must sign an affidavit concerning their Israeli resident tax status, the language of which is here.

A foreign resident purchasing any residential property or an Israeli resident purchasing a second or more residential property will pay the following rates (all figures are in New Israeli Shekels):

On the amount from 0 to 1,089,350 – 5%
On the amount from 1,089,350 to 3,268,040 – 6%
On the amount from 3,268,040 to 4,500,000 – 7%
On the amount from 4,500,000 to 15,000,000 – 8%
On the amount above 15,000,000 – 10%

An Israeli resident purchasing a sole property pays the following rates:

On the amount from 0 to 1,470,560 – 0%
On the amount from 1,470,560 to 1,744,270 – 3.5%
On the amount from 1,744,270 to 4,500,000 – 5%
On the amount from 4,500,000 to 15,000,000 – 8%
On the amount above 15,000,000 – 10%

Anyone making Aliyah within 2 years of the date of the purchase contract is considered to be an Israeli resident at the time of the contract. Ownership of less than 33% of another property is not considered ownership of another residential property and still entitles the purchaser to the beneficial rates. If the purchaser owns one other residential property and sells it within 24 months of purchasing this property (or if purchasing from a developer within 12 months of the date of possession) then this purchase is still considered a sole purchase and is entitled to the beneficial rates.

Under the previous tax rates a purchase of a sole property in Israel, whether by an Israeli resident or by a foreign resident, was entitled to the following rates:

On the amount from 0 to 1,470,560 – 0%
On the amount from 1,470,560 to 1,744,270 – 3.5%
On the amount above 1,744,270 – 5%

Case Study:

We will look at the changes affecting a purchase of an apartment costing 3,600,000 New Israeli Shekels, which is just over $1m at the current exchange rate. Under the previous rates a foreign or Israeli resident buying this apartment as their sole purchase in Israel would pay a tax of 102,367 shekels. This is the amount an Israeli resident purchasing a sole residential property would pay nowadays too. A foreign resident would now pay 208,426 shekels in tax, which is more than double the previous amount.

As can be seen the new tax laws are complicated and competent legal and tax advice should be sought before signing any purchase contract.

Disclaimer: The information contained above should not be regarded as legal advice but rather for informational purposes only.

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