As the late US Senate minority leader Everett Dirksen reportedly said, “A billion here, a billion there, and pretty soon you’re talking real money.” And that is precisely the kind of money that our government is planning to soak up from the Israeli public by extending the tax net. And in particular, the real-estate taxes, which affect all of us.
Nobody likes to read about taxes, but it’s worth asking how the new real-estate tax reform will impact you.
The latest real-estate tax reform is massive in both breadth and depth, impacting any home owner and home owner to be, whether an Israeli or foreign resident. Surely you’ve seen headlines over the last several months announcing the reform, but do you know what it’s all about? Let’s just have a short overview.
What kind of taxes do we have to pay on real estate? The two most common taxes applied to real-estate transactions are purchase tax and appreciation tax (also called betterment tax). Purchase tax, as you might have guessed, is paid by the buyer and is calculated as a percentage of the purchase price. Appreciation tax is levied on the seller and is calculated as a percentage of the appreciation of the property; i.e., the increase in value of the property, not the full price. For example, if I purchased my home for NIS 1 million and I sold it for NIS 1.5m., then I may be liable to pay appreciation tax on NIS 500,000. However, in many cases, various exemptions may apply.
What changes are being made and how do they impact me? One of the most significant changes relates to anyone who owns more than one apartment. Until now, it didn’t matter how many properties you owned; you could still enjoy a tax exemption, called the “four-year exemption.”
As long as you sold just one apartment every four years, and no more during the period, you would be entitled to an exemption from appreciation tax. All you had to do was plan ahead and time your sales correctly.
This exemption was the most commonly used exemption. Until 2014 that is.
Because this legally tax-free mode of accumulating wealth will disappear as of 2014; anybody owning more than one apartment, regardless of when he or she last sold, may be liable for appreciation tax.
Keep in mind that even ownership of a certain portion of an apartment is still considered ownership of an apartment.
According to the previous law, ownership of 25 percent or more was considered ownership of an apartment for tax purposes. This means that if three grown siblings inherited their parents’ home in equal shares, and they each owned their own homes, they now all became the owners of two apartments for tax purposes.
However, the new law provides more leeway, defining ownership as having rights to more than one-third of an apartment. In this case, the three siblings sharing ownership of an inherited apartment would each be viewed as the owner of just one apartment.
But let’s return to our exemptions.
Since the four-year exemption is being canceled, the “single-apartment exemption” will now become the main exemption.
If the apartment being sold is the seller’s only apartment, he or she may be exempt from appreciation tax.
However, there are a few requirements that need to be met to qualify for the exemption, and here, too, some changes were made to the law.
To qualify for the exemption, the seller has to have owned the rights to the apartment for at least 18 months. For those who wish to buy a newly built apartment, be aware that the countdown of the 18 months begins to kick in only from the day the apartment is fully ready and built. So when buying a new home “on paper,” if you plan to sell as soon as it’s ready, you will have to wait out the period to enjoy the exemption.
On the other hand, there is one requirement that is being left out of the new law. Previously, you could only qualify for this exemption if you did not own two apartments simultaneously at any point during the four years prior to the sale. This requirement was dropped in the new law.
The new law will only be applied in full force beginning on January 1, 2018, with special transition orders coming into play for a four-year period, beginning on January 1, 2014, which is right around the corner. Our next columns will touch upon these transition orders, as well as changes the reform has made regarding foreign residents.
The above provides general information only, and detailed advice must be obtained prior to any action taken.
office@drkatzlaw.com Dr. Haim Katz is a senior partner in a law firm with offices in Tel Aviv and Jerusalem, specializing in real estate, inheritance, international trusts, commercial and family law.
Sam Katz is a jurist living in Jerusalem.