Legal Ground: Watch out! New property tax on the way

A new problem looms on investors’ horizon.

By HAIM V. KATZ, SAM KATZ
Several indicators show that the Israeli residential market shot up over the previous year. The price rise in the residential market has been an astounding 21.3 percent. Israel is in third place in the world in terms of the rise in housing costs. Ahead of us were Hong-Kong (23%) and China (21%). For comparison, house prices in Ireland tumbled 18.5%. If you’re looking for real bargains, why not venture as far as Latvia, where prices have gone down 49.8%.
The Israeli public has lost faith in the stock market and with low low interests rates in the banks – the lowest since the establishment of the Bank of Israel in 1954 – and has developed, instead, an unbridled enthusiasm for investment in residential property.
A large percentage of residential purchases are for investment purposes and are let on the open market. Many of the investors are not necessarily wealthy, but people are looking for a long-term investment to provide for old age and other contingencies. We have written in previous columns about the problems facing landlords. However, now a new problem looms on the investors’ horizon.
CAPITAL-GAINS TAXGovernment circles are mooting the idea of canceling exemptions granted from capital-gains tax on investment properties.
What worries the government is that the Israeli property market turns over tens of billions of shekels a year, but the tax income on residential apartments in 2009 was a paltry NIS 180 million. Furthermore, the overheating of the market is giving rise to concerns that residential market prices will put accessible housing out of the reach of large sections of the population.
The suggested tax structure would mean that every owner can have one apartment that will be exempt from capital-gains tax upon sale. The basis of this idea is that a person should not have to pay tax on his own private residence. It is possible that there will be a limit on this exemption, so that luxury apartments worth more than NIS 5m. will not be exempt.
On the face of it, this could be a popular move. Taxing the rich is always presented as an easy fix for a variety of ailments. The question is whether the new tax actually will increase the state’s revenue and will it reduce housing prices?
Real-estate professionals, accountants and lawyers have expressed doubt about whether the cancellation of the exemption will actually cool down the market. On the contrary, some say, the hundreds of thousands of investors who have taken mortgages to acquire second and third apartments will inevitably compensate themselves for the loss caused by the tax by raising the sale price.
SMALLER LANDLORDSFrom a social-engineering point of view, the fear has been expressed that the decision will affect middle-income groups. Does the Treasury wish to drive more people to invest in the speculative stock market?
The losses to smaller landlords who, will now have to pay 20% capital gains on their investment properties, will be significant because 20% is equivalent to the real profit they made over 10 years or more. Furthermore, there is a real risk that such a move will diminish the stock of the apartments for rent – this at a time when there are not enough rental properties as it is.
Alternatively, landlords will simply raise rental prices to maintain the return on their investment to match the pretax revenue. Inevitably, the ones who will suffer will be lower-income groups who cannot afford to buy, such as young couples and students.
There is no definitive conventional wisdom when it comes to predictingthe effect of such government intervention on the market. But it wouldseem that the real-estate market is flourishing because of the currentexemption, and a new tax will slow down the market and inevitablyreduce the number of transactions.
This will frustrate the government’s intention, diminish the expectedtax income, and instead of cooling down the housing prices, it willhave the opposite effect.
israelaw@netvision.net.il
Dr. Haim V. Katz is a senior partner in a law firm withoffices in Jerusalem and Tel Aviv specializing in real-estate,commercial, family and probate law. Sam Katz is a Jerusalem jurist.They have collaborated on several legal works on probate and land law,including the e-book Buying Your Home in Israel.