Double Arnona (property tax) on empty apartments – the how, what and why?

In continuation of recent efforts to encourage foreign owners to sell or rent their properties out, the government has followed through on its threat to charge double Arnona (property tax) on empty apartments during 2015 and 2016.

The regulations state that any property that has not been lived in for 9 out of the 12 months prior to the Arnona bill will be charged double, starting in 2015 based on the 2014 usage. The local authorities are charged with discovering the existence of these properties, which the finance ministry claim number 46,855 in total, including 4,746 of them in Tel Aviv and 3,429 in Jerusalem. These figures are based on electricity usage of less than 10% of the national average.

Table taken from Globes online:

However the Jerusalem municipality claims there are some 10,000 of these empty apartments in Jerusalem alone, based on water usage. There will probably be an attempt by some cities to broaden the net as much as possible to bring in significantly greater Arnona – if there are indeed 10,000 of them in Jerusalem then doubling their Arnona (which can easily range from 5-10,000 shekels a year) will bring in a significant windfall for the city, from people who can probably afford it.

My prediction is we’ll see a cottage industry of apartment managers of high end properties who are paid to turn on the taps, run the washer, dryer and AC for a few hours every month, or even just set them on a timer for four months out of the year, which would all still be cheaper than paying the double Arnona.

The mayor of Jerusalem Nir Barkat has tried unsuccessfully in the past to encourage owners of empty luxury apartments to rent them out to students. Despite previous failures he rather naively hopes that the double Arnona tax in force will now have the desired effect. He is planning to compile a list of trustworthy tenants who will vacate the apartment when the owner wishes to use it.

These property owners are unlikely to decide to rent out their luxury apartments long term to strangers to receive a pretty low return on the rental (usually 3% of the value or less on luxury properties) yet this will increase greatly the depreciation of the valuable property, the potential for damage to their personal items and they risk having to evict a recalcitrant tenant. If they’ve already decided to forego the yearly rental they will be willing to suffer the payment of another few thousand shekels, probably less than one month’s rent, if they really have to. If the recent cancellation of the exemption from capital gains tax for foreign owners – which is a tax that could run into the hundreds of thousands of shekels – did not persuade many to sell, then a few thousand shekels a year penalty – even if enforceable – will not make any difference.

In case you weren’t aware, for many years now there has been an exemption under law from Arnona for empty apartments for a one off period of up to 6 months! So they will let you not pay any Arnona if your apartment is empty for up to 6 months but then charge you double Arnona if it is empty for nine months? For some years now since this idea was first floated we have recommend to our foreign clients not to file for this one-time exemption for 6 months as the very people who filed for this will be the first ones they come to to claim the double Arnona on empty properties! However if they do charge you the double Arnona there may be no restriction in the law for filing the exemption for 6 months which has to be worth a try and could get very interesting.

The municipalities will have to deal with numerous other issues that will arise, such as exempting anyone who has just purchased an apartment that was empty the previous year, though how will that be defined? What if they purchased it in January and left it empty? What about those owners who do eventually decide to rent it out, will their tenants have to pay double because the owner did not rent it out the year before? Will the Arnona bill be split between Landlord and Tenant even though the lease states the Tenant is responsible for the Arnona? What about a Landlord who leases to a Tenant who lives abroad and only uses the property 3 months a year? Who then pays?

It’s also unclear if the water and electric companies are legally allowed to release information about apartment owners to the local authorities as it could be a breach of privacy laws. The committee chairmen in the Knesset claimed it is legal but declared that if it appears the utility companies cannot transmit that information legally then the Knesset will enact legislation correcting it.

I see this is a populist and misguided law, that will create more headlines than apartments for sale. Foreign buyers who own significant numbers of these empty properties have increased demand in Israeli real estate and pushed prices up in the luxury market, of that there is no doubt. But on the positive side they are investing millions upon millions in foreign currency from abroad into the country and paying Arnona for municipal services that they hardly use (which they now have to pay double for!). These apartments are also in the more upscale parts of town and already pay significantly higher Arnona than other areas.

The answer does not lie in unenforceable measures targeting the wrong groups but rather by increasing supply, decreasing the Kafkaesque bureaucracy and stream-lining the process and developing further transport links to the periphery to overcome the lack of a commuter culture.

Most importantly we should be encouraging foreigners to come to Israel to invest in our real estate, to bring their families regularly thereby strengthening their bond with the country and the people with the hope that they invest further or even end up staying. In the meanwhile we should focus on releasing more land, increased construction, less red tape and making real estate more affordable for everyone else.

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