The Israeli real-estate market has fallen from its peak. If you are a serious
investor, tax is a cost like any other cost to be contained as far as reasonably
possible. And foreign investors in Israeli real estate will want to minimize
taxes in both Israel and their country of residence.
Therefore you need
to plan with tax advisers in each country various aspects, including:
Entities: company, partnership, trust, REIT.
• Transactions: regular
trading, long-term leasing, etc.
• Finance: local or
• Avoiding double taxation: credit for Israeli tax against
tax in the home country.
Israel’s tax treaties with over 50 countries
help, but only partly. Consider not only income tax but also acquisition taxes,
betterment taxes, VAT, capital-gains tax, inheritance tax,
Israel reformed its real-estate tax and title
procedures in 2011. The buyer may now get title after paying 40 percent of the
consideration to the seller and a withholding tax of 15% (or 7.5% if the seller
bought before November 7, 2001). No withholding tax applies if you buy from a
recognized builder with Tax Form 50. Taxes are reportable within 40 days and
payable within 60 days. Separately, local mortgages rules were
Israel imposes an acquisition tax of up to 5%,
generally or 7% for homebuyers who already own a home in Israel.
the home was NOT used for residential purposes in the four years preceding the
sale or 80% of the period of ownership, the seller may get a sale exemption if
the sale occurs by June 30, 2013 and the buyer starts living in the home within
6 months. The buyer must continue living there for two years – or else the buyer
pays acquisition tax at a penal rate of 15%.
So caveat emptor – buyers of
any home in Israel beware.
Tip: There are reductions for homes for new
immigrants and those with no other home in Israel.
are possible if agricultural land is rezoned as available for construction.
Permission is needed from various bodies. You may have to forfeit part for
roads, etc. A betterment levy (typically 50% of assessed amount) and other fees
Tip: Much Israeli land is held on a 49-year lease from the
Israel Lands Authority. If the holder’s time is up, consider renewing the lease
with future rezoning ability.
If this is for you, there is a
lot to check. Construction can be for your own occupation, renting out, sale or
service to others.
Check if this is a business activity having regard to
your expertise and frequency of dealings in real estate.
Businesses can sometimes recover VAT on expenditure (16%) unless the
construction is for residential rental.
• Long-term construction projects
(over one year) for customers are taxed in Israel only after 25% completion by
value or quantity, at your option, is reached.
• Non-business status can
sometimes reduce Israeli income tax on rental income.
• Businesses and
non-businesses can claim Israeli depreciation and finance expenses, subject to
• Purchasing groups (of investors) with a paid organizer can
no longer get acquisition tax or VAT breaks by splitting the land purchase from
Private landlords of Israeli homes can
choose between: 1. No Israeli income tax if total monthly rental income is less
than NIS 4,910 (in 2012). For each NIS 1 above that, you lose NIS 1 of
2. Israeli tax at 10% on gross rental income, due by January
30, regarding each preceding calendar year.
3. Israeli tax at regular
rates on rental income net of expenses, depreciation and mortgage
Tips: Depreciation is on the building element, not land. This
can sometimes reduce your tax bill a lot: • The depreciation rates are 2% of
cost for a good-quality building; otherwise 4%.
• Higher rates of 7%-15%
apply to mechanical and electrical equipment.
• If the building element
is unknown, you are allowed to assume it is two-thirds of the overall
• Each asset is depreciated separately on a “straight-line” basis
(percentage of cost, not written-down balance).
individual tax rates range up to 48% in 2012.
National Insurance payments
also apply at various rates but are minimal for foreign residents and zero under
the 10% tax option. Companies pay Israeli company tax at a rate of 25% in 2012.
Dividends are taxed in Israel at 25%-30% usually, subject to any tax
Israeli tax breaks are available for long-term
residential-commercial rental projects. These tax breaks may be protected from
home-country tax under special rules in a few tax treaties; e.g., the UK-Israel
Israel imposes land-appreciation tax (LAT) on capital
gains from Israeli real estate. The Land Registry (Tabu, a Turkish word) checks
that you don’t forget. In the case of “TAMA 38” anti-earthquake projects, the
taxable event is postponed until conditions are fulfilled or the option is
Companies and individuals generally pay 25% tax, if the real
estate asset was acquired after November 7, 2001.
Tip: Individuals are
exempt from LAT on Israeli home sales in various cases, including:
• After an
18-month waiting period following a previous exempt sale, if they only own one
home in Israel.
• After a four-year waiting period following a previous
exempt sale, if they own more than one home in Israel. From 2013, an eight-year
waiting period will apply.
• In 2011-2012, two more home sales are exempt
if the sale price is no more than NIS 2.2 million. Above that, a pro rata
• See above about sale of a home used as something
• It doesn’t matter where the seller resides, or what other
properties the seller has, outside Israel.
• For assets acquired in 1961
or earlier, special reduced tax rates may apply.
• Vacation apartments
(Dirot Nofesh) do not qualify for any exemption or special
Check whether you must move out after a period (e.g. 6
Needs careful checking. Note that 16% VAT and 25%-30%
withholding tax usually apply to interest unless it is paid to an Israeli
Tip: Consider routing non-Israeli finance through
an Israeli financial institution.
The above is extremely general and
brief. You should consult Israeli property specialists (engineers, etc.) as well
as legal and tax advisers in each country.
Leon Harris is an
Israeli CPA and tax specialist at Harris Consulting & Tax Ltd.