Changes in Israel real estate tax law effective 2011


By Nicole Levin


What to do about the Israeli real estate bubble?  That has been the question asked by many Israeli real estate professionals and government officials.  The prices of apartments have soared in the past few years making buying an apartment for many families a pipe dream.

In steps the Israeli Ministry of Finance to save the day! I am being facetious of course.   In mid February of this year the Ministry of Finance enacted a series of changes to the existing laws governing  purchase tax and capital gains tax.  The purpose of some of these changes was to stop the rising real estate prices.  Below please find a few of the changes:

1. Change in the purchase tax.  Purchase tax for single apartments was lowered while purchase tax for an additional apartment was raised.  This helps young couples and families purchasing a home (where this is going to be the only apartment they own) as it greatly reduces the purchase tax they will have to pay.  Indeed, if the apartment is less than 1,350,000 NIS there won’t be any purchase tax to pay at all.  However, anyone who already owns an apartment and would like to invest in real estate by purchasing an additional apartment will pay a much higher purchase tax.  Indeed, if the additional apartment that they buy is  1,000,000 NIS they will pay 5% of this - a whopping 50,000 NIS!  Anyone who enjoyed in the past a partial exemption from purchase tax (such as new immigrants and disabled people) should crunch their numbers first.  After these changes the difference between the purchase tax paid by a new oleh for example and that paid by the purchaser without this exemption is negligible and in some cases the new oleh will pay more if he asks for this partial exemption!

2. Change in Capital Gains Tax.   In all real estate transactions the sellers are liable to pay capital gains tax.  In the case of residential apartments the existing law allows for several types of exemptions from this tax. Examples of this are:  If a person owns more than one apartment then he can sell one of his apartments with an exemption from capital gains tax every four years.   If the seller has only one apartment then he can get an exemption from capital gains tax once every year and a half.  This means someone (who only has one apartment) can buy an apartment, sell it and get an exemption and then buy another apartment instead of the one he just sold and sell that apartment in a year and a half and get an exemption from capital gains tax on that apartment too.  There are also exemptions for the sale of apartments gotten through inheritance, giving apartments as gifts between close family members, the sale of two small apartments in order to buy one large one etc.  Under the new law (which will be in effect for a period of two years only, unless extended) sellers will be able to get an additional two exemptions in addition to any exemptions they could have gotten under the existing law.  This means that people with multiple apartments can sell some or all of them and get exemptions from capital gains tax for these sales without having to wait the four years between sales with exemptions.

3. Limit to the exemptions from capital gains tax under the new law: The additional exemptions in the new law are limited to a price of 2,200,000 NIS.  This means that if the price of the apartment sold is less than 2,200,000 NIS then the seller will get a full exemption from the capital gains tax.  If the price of the apartment sold is more than 2,200,000 NIS then the seller will get an exemption from the capital gains tax for the amount of the price up till 2,200,000 NIS and he will be taxed for the amount of the price above 2,200,000 NIS.

4. What happens to the exemptions under the previous law:  Sellers can still use the exemptions from capital gains tax that were in effect under the previous or what I called above the existing law.

5. Tax planning:  The changes in the law make it necessary for sellers to do some tax planning with their real estate attorney.  For example, if a seller has an apartment that is worth 3,000,000 NIS and an apartment that is worth 2,000,000 NIS he can get an exemption now for both apartments without waiting four years between sales.  He should use the previous law for the exemption from the capital gains tax for the apartment selling for 3,000,000 NIS  because the previous law did not have a price limit and only apartments that sell for more than 2,200,000 NIS can get a full exemption from the capital gains tax under the previous law.  For the apartment selling for 2,000,000 NIS the seller should ask for the exemption under the new law.  This is just a simple example of how a little tax planning can save a lot of money.

6. New changes to the new law:  The new law is in effect until the end of December 2012.  The purpose of this law is to encourage people with several apartments to sell them now, thereby flooding the market with more second hand apartments which may bring down the prices.  In order to put pressure on all apartment owners to sell their apartments now, another change in the law was enacted in August of this year.  According to this change, starting from 2013 the law pertaining to the exemption from capital gains tax will revert to what it was before, but the exemption from capital gains tax will only be allowed once every 8 years for people who own more than one apartment.  However, people who only own one apartment may sell once every year and a half and get the exemption from capital gains tax just as they did under the previous law.

The new law has brought with it many legal and technical problems as well.  We will have to wait and see if the changes in the law will bring about the desired effect of bringing down the prices of apartments in Israel or at least of stopping the rise in prices.

Nicole Levin is an American born, Israeli trained real estate attorney with over 28 years experience in Israeli Real Estate transactions.  Nicole Levin has offices in Jerusalem, Modiin and Beit Shemesh.  To get Nicole Levin’s free ebook “Essential Things You Need To Know About Buying Real Estate In Israel “ sign up for her newsletter at  www.levinlawoffices.co.il.

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