By Mirit Reif, Adv.

When one sells a property in Israel he is obligated to pay capital gains (CG) tax on the profit of the sale. CG tax will apply whenever there is a value difference between the original purchase price and the current sale price (not including inflation increase).

A CG tax exemption will apply when an Israeli resident that owns a single home which is his only property in Israel, wants to sell it. In this case, he may sell his only home in Israel once every eighteen months with a full tax exemption on any profit gained.

Please note that this exemption applies only when the selling price is no higher than 4,443,000 million shekels (updated for 2017). Above 4,443,000 million shekels CG tax will be applied even if the sale is of a single home.

Starting January 1, 2014, foreign residents were entitled to the exemption from the CG tax mentioned above, only if they proved that they do not own a home in their country of residence, even if they only owned one home in Israel. In order to grant the exemption the Israel Tax Authority (ITA) requested to receive a statement from the tax authorities of the foreign country, that the foreign resident does not own a home in his country of residence (the "Statement"). This Statement was the only form of proof that the ITA would accept up until now according to clause 49a (a) of the Land Tax Law (Purchase and Capital Gain) 5723-1963 (hereinafter: the "Law").

The ITA published on January 19, 2017, an annex to the implementation instructions for the Law allowing the foreign resident to submit alternative documents to prove that he does not own an asset in his country of residence.

It is important to note that these alternatives will only be accepted from sellers that reside in a foreign country whose tax authority does not issue a Statement as mentioned above. Currently, only Russia and Belgium issue such Statements and as such for residents of these countries the ITA will approve the exemption by a submission of a Statement only.

The procedure for submitting the alternative documents

The seller needs to provide objective evidence to the satisfaction of the ITA manager, proving that he does not own a residential apartment in his foreign country of residence.

1. The seller needs to provide evidence regarding his place of residence in the foreign country and the nature of his rights to this residence. To achieve this, he needs to produce a lease or another agreement attesting that he is only a tenant and not the owner of the residence, and confirmation from the municipality that he pays municipality taxes as a tenant and not as an owner, similar to the "Arnona" document in Israel, if such a certification exists.    
2. Confirmation from the Tax Authority of the country of residence that the seller did not report rental income from a residential property or any other real estate property that he may own. Alternatively, the seller can submit a copy of his tax returns for the relevant period. In the event that the seller received rental income that was not derived from a residential property but from another, such as a business, he can attach an affidavit drawn up in accordance with Israeli Law, declaring that the income is not from a residential asset.  
3. To support the above documents the seller will also need to provide an affidavit (drawn up in accordance with Israeli Law), whereby the seller declares that he has no rights to another apartment in his country of residence.

It is important to note that in the event that the country of residence is divided into states such as the United States or into districts such as Switzerland the seller will need to provide the government and municipality documents mentioned above, relevant to each state/ district of that country. 

There are still many open questions regarding this annex, for example how many years back does one need to supply tax returns. Clarifications to this annex will be given over time and published on our site once they are announced and made public by the Israeli Tax Authorities.

The content of this article is intended to provide a general guide to the subject matter and is not a substitute for legal consultation. Specific legal advice should be sought in accordance with the particular circumstances.