For the past few months we have been hearing about the new Real Estate Tax Law
reform that was published at the beginning of August.
The reform already
went into effect on August 1 for acquisition tax and will go into effect on
January 1 for the main part of the land-appreciation tax.
It seems that
the purpose of the reform is to discourage investors in real estate and to
encourage owners of multiple homes to sell their homes, thereby flooding the
market with homes and thus bringing down the price of residential real estate.
The tax reform is sweeping, and it requires Israeli real-estate professionals to
relearn the Real Estate Tax Law.
In this article we will endeavor to
explain some of the changes in the law.
First of all, to understand what
is different, one must understand what went on before. In every real-estate
transaction there are at least two types of taxes.
is paid on the profit from the sale of real estate, and acquisition tax is paid
on the acquisition of real estate. Land-appreciation tax is paid by the seller,
unless otherwise agreed to by the parties to the contract, and acquisition tax
is paid by the purchaser. The tax reform relates to both land-appreciation tax
and acquisition tax.
Land-appreciation tax In the past and until this
December 31, anyone owning more than one residential home in Israel could sell a
home every four years and get an exemption from land-appreciation tax as long as
the seller fulfilled certain conditions set out in the law.
Now, as of
January 1, an exemption from land-appreciation tax for the sale of residential
property will only be given when the home sold is the only home owned by the
seller. If the seller owns more than one home at the time of the sale, he will
not be entitled to the exemption from land-appreciation tax.
change in the law is the limitation of the exemption from land-appreciation tax
to the part of the price up to NIS 4.5 million. If the price of the home sold is
more than NIS 4.5m., then land-appreciation tax will be levied for the amount of
the price above NIS 4.5m.
Under the current (or soon to be previous) law,
there was no limitation on the price for which someone could get an exemption.
For example, one could sell a home for NIS10 billion and get an exemption from
land-appreciation tax if he met with the conditions of the law for this. Another
change in the law is the cancellation of the exemption from land-appreciation
tax for foreign residents, even if they only own one home in Israel, unless they
can prove that they do not own a home in their country of residence.
this is to be proved is not known, and so it appears that there will be no
exemption from the land-appreciation tax for foreign residents. Many countries
levy tax on their residents or citizens for the sale of property abroad, and
they allow the amount of tax levied in the country where the home is located to
be credited against the tax that they charge.
Where this is the case,
there is usually no damage to such a foreign resident who will now be forced to
pay land-appreciation tax in Israel. However, under the current and soon to be
previous law, a foreign resident could get an exemption from the
land-appreciation tax if he met the conditions set out under the law for
The reform has left exemptions from land-appreciation tax in the
following instances: when the home sold is the seller’s only home; when the home
sold was inherited; when selling two small homes to buy one larger one; the sale
of building rights in a condominium; the sale of residential property inherited
by nonprofit organizations. Each of these exemptions is subject to conditions
set out in the law It is the policy of the tax authorities not to grant an
exemption from land-appreciation tax to foreign residents for homes inherited by
Under the previous law, one could give a sibling a gift of a home
and not pay land-appreciation tax. Under the reform, this exemption is only
allowed when the gift is between parents and children. However, sometimes there
may be an exemption from land-appreciation tax from sibling to sibling if the
property originally came from the parent.
Under the reform, the exemption
from land-appreciation tax that is given for the sale of the single or only home
is granted once every 18 months. If in addition to the home being sold the
seller owns up to one-third (as opposed to one-fourth under the previous law) of
another home, then he will be deemed to own only one home. The tax authorities
see a married couple and their minor children as a family unit. So if one person
in this unit owns a home and another person in the family unit owns a different
home, then each one of them will be deemed to own more than one home and in
doing so will not be entitled to the exemption from land-appreciation tax when
selling a home.
All is not lost for anyone not entitled to an exemption
from land-appreciation tax after January 1, 2014, and until December 31, 2017.
For this type of seller there are three magic Hebrew words: shevach reali
lineari. The term shevach reali means the actual profit from the sale after all
expenses and costs for the purchase and sale of the home are taken into
Under the reform, this type of seller will be entitled to a big
prize (and we are not being facetious). The actual profit (the shevach reali
lineari) earned on the home up to January 1, 2014, may be erased. However, this
can be used only twice during the above period on homes acquired before 2014.
This can mean possibly no tax or very little tax for the sale of a home even
when no exemption is available for the seller.
However, “profit” earned
due to the inflation will be taxed.
Each case is different and must be
investigated individually to see if the seller can enjoy the benefits set out in
the law. It is then critical that owners of multiple homes sit down with Israeli
advisers now and do some very careful tax planning.
Acquisition tax The
tax reform has brought about changes in acquisition tax as
Acquisition tax on property that is not residential has been raised
from 5 percent to 6%. Acquisition tax for the purchase of an additional home or
acquisition tax for the purchase of a home by a foreign resident is higher than
the acquisition tax for the purchase of a home where the purchaser has no other
home. The tax has been raised for expensive homes. Ownership of onethird of a
home will not be deemed ownership of an additional home.
Again, each case
may be different and should be investigated individually. It is clear that
careful acquisition tax planning is necessary when purchasing a home as an
investment as well.
What tips can we offer? US investors may want to
consider using a US LLC (limited liability company) to invest in Israeli real
estate. It seems an LLC will only pay 26.5% company tax in Israel on rental
income and sale gains, which should be creditable against US taxes.
are special rules dealing with property acquisition groups; old techniques for
avoiding VAT and/or acquisition tax on part of the purchase price have been
More generally, beware of purchasing groups with 35 or more
“offerees” – a full-blown listing prospectus may be needed by
Limited partnerships exist in Israel, the US and many other
countries; investors get limited liability, but only the general partner can
manage the operation.
Tax rates in Israel may range from 25% to 52% (in
limited instances), but can usually be credited against taxes in a foreign
investor’s home country. Complex rules apply to REITs (Real Estate Investment
The above tax reform has set the whole system on its head. It is
not yet clear if the results will be worth the chaos such a massive change in
the law has caused.
As always, consult experienced tax advisers in each
country at an early stage in specific cases.
email@example.com firstname.lastname@example.org Nicole Levin is an American-born, Israeli-
trained real-estate attorney. Avi Gurman is an Israeli tax lawyer. Leon Harris
is a certified public accountant and international tax specialist at Harris
Consulting & Tax Ltd.