March 26, 2014

Benzi Jablinowitz, Adv. & Mirit Reif, Adv.

The laws regarding purchasing and selling property in Israel have recently changed. This article will attempt to clarify and explain the tax matters that may concern a private individual interested in purchasing property in Israel.

There are two main tax issues that may occur in a case of a property transaction in Israel. The first is acquisition tax, which may apply to the purchaser. The second tax is known as capital gains tax, which is imposed on a seller in case of profit gained as a result of the sale. There are additional tax matters with regard to property transaction, however, as long as the transaction does not involve an entity, building rights or undeveloped lands, the only relevant taxes are the two mentioned above.

Acquisition Tax:

The marginal rate of Acquisition tax is 6% of the total purchase price and it is imposed on the purchaser of the property. Nevertheless, there is a different rate that applies on purchase of residential homes in Israel, as follows:

Singular home – for an Israeli individual purchasing his first and only home in Israel the tax brackets have changed and in addition, two more were added; an 8% bracket and a 10% bracket. It is important to note that the sums are accurate for the period of January 16, 2014 until January 15, 2015:

The laws have recently changed and starting August 2013, a non Israeli resident will not be entitled to the low tax rate that is granted for purchase of a single home in Israel. The tax rate that will apply will be the same rate that applies for purchase of an additional home, starting at 5% and up to a marginal 10% tax rate for homes purchased for over 15 Million Shekel.

However, if one immigrates to Israel by making ALIYA or become a תושב חוזר ותיק (resided outside of Israel for at least 10 years) within two years of purchase, they will be entitled to a tax refund, benefiting the reduced tax rate of a single home.

The tax rates for foreigners and for Israelis purchasing an additional home are as follows (applicable until December 31, 2014):

In addition, in the event of an exchange where one purchases a second home with the intention to sell his original home, there is a time period of 18 months after the purchase, in which one may sell his first home and pay purchase tax on the second home by the reduced rate of a single home.

Alongside the general tax concessions described above, there are particular tax reliefs that apply in cases such as a gift transfer amongst relatives, where the receiver will be required to a third of the usual tax rate.

Another tax relief is in a case of purchase by an "Oleh" (an individual requesting residency by virtue of the statute of return) in which the tax rate will be:

This exemption can be used starting one year before receiving residency, and ends seven years afterwards.

Capital Gains (CG) Tax

CG tax will apply whenever there is a value difference between the original purchase price and the current sale price (not including inflation increase!). CG tax is imposed on a seller of a property on the amount of the appreciation.

The CG tax exemption which allows an Israeli resident to sell a residential property once every four years with a full tax relief was canceled on January 1, 2014. The only tax exemption that remains is in a case of an Israeli individual that owns a single home which is his only property in Israel. 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 4.5 million shekels. Above 4.5 million shekels CG tax will be applied even if the selling is of a single home.

Another important change that has been made applies to foreign residents. Starting January 1, 2014, foreign residents will receive the exemption from CG mentioned above only if proven that the foreign individual does not own a home in his country of residence even if he only owns one home in Israel. The Israel Tax Authority will accept such a statement only from the tax authorities of the country of residency, otherwise no exemption will apply. If certain terms are met, The CG might be calculated as follows- the gain up until 2014 will not be taxed, if they did not use an exemption for at least 4 years prior to December 31^st 2013 and from 2014 until the actual sale, there will be a 25% tax on the relative gain for that year. This tax calculation is called a "Betterment Tax".

In a case of a gift transfer amongst relatives of first degree relation, the law no longer considers transfers between siblings as "gifts between relatives" for tax relief purposes. In this case the transferor will pay regular capital gain tax. In a case of a gift transfer between relatives that are not siblings the transferor will enjoy a full tax exemption.

It should be noted that utilizing a tax exemption by the receiver of the gift is conditional and subject to holding period of the property by receiver.
In order to properly benefit and utilize the tax exemptions described in this article, it is strongly recommended to receive advice from an Israeli real-estate attorney familiar with the relevant tax laws. This article is not a substitute for personal and particular legal advice.

Hacohen Wolf is a law firm specializing in Real Estate, Taxation and Commercial Law with offices in Jerusalem, Tel-Aviv, New York, London, Amsterdam and China.