New home-sale exemption – caveat emptor!

The Israeli real-estate market is in a state of flux and so is the tax treatment for homes.

By LEON HARRIS
August 23, 2011 22:31
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Leon Harris is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.

The social-justice movement in Israel is starting to make its voice heard. On August 3 the Knesset passed a rushed amendment that allows another alternative home-sale exemption. But caveat emptor: every home purchaser and his or her lawyer had better beware of the potential pitfalls.

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30,000-feet overview

Israel has long granted individuals an exemption from Israeli land-appreciation tax (capital-gains tax on Israeli real estate) on the sale of one Israeli home every four years if the seller owns more than one home in Israel. If you own only one home in Israel, you can claim an exemption every 18 months. The home must be a qualifying home, which is one used for residential purposes (or not used) in the four years preceding the sale or 80 percent of the period of ownership.

On February 16 the Knesset granted an alternative exemption (hereinafter: “the first alternative exemption”) for two more qualifying home sales in calendar years 2011 or 2012, provided the sale price does not exceed NIS 2.2 million (about $610,000) each. If the sale price is more, a pro rata exemption is available.

On August 3 a second alternative exemption was enacted for NON-qualifying homes; i.e., homes that were used for nonresidential purposes, such as offices or warehouses. This happens quite a lot in Israel, notwithstanding the dubious validity sometimes.

Otherwise, subject to a few exceptions, land-appreciation tax is due at a rate of 20% on the post-November 7, 2001, portion of the real (inflation-adjusted) portion of the gain, and marginal personal tax rates (up to 45%) apply to the remainder of the real gain.

Main terms of the second alternative exemption



The second alternative exemption applies to sales in the period August 1, 2011, to August 30, 2013, of all rights in up to three non-qualifying homes. The sale agreement must specify that the home cannot be used for residential purposes for two consecutive years commencing six months after the buyer receives possession or one year after the sale, whichever is earlier.

Failing this, the buyer must pay acquisition tax (mas rehisha) at the penal rate of 15%, instead of the usual rates of 0%-7%.

So the buyer and his or her lawyer should be very careful indeed regarding any home purchase, in case the home was used for nonresidential purposes. This is a bad law because the buyer will not usually know how the seller used the home in the past; in other words, caveat emptor.

If the seller claims the second alternative exemption, the buyer gives the Israel Tax Authority a guarantee that the home will be used for residential purposes for the required two years or else pays the 15% acquisition tax upfront and claims a refund after the two years are over for tax overpaid.

Obviously, giving the guarantee looks more attractive, but will your bank or mortgage bank allow this? In addition, to prevent tax planning by passing homes around, this second alternative exemption does not apply to: (1) the sale of a home that was acquired by way of a gift in the period June 5, 2011, to June 30, 2013; or (2) a sale to a relative.

This second alternative exemption will not count if you want to sell another home under the main exemption (once every four or eight years – see below) by June 30, 2013.

But this second alternative exemption will count if you sell a second home after that date. And three or more sales under the first and second alternative exemptions will count too.

Amendment to the main exemption

The once-every-four-year home-sale exemption will become a once-every-eightyear exemption for Israeli homes sold in the period January 1, 2013, to January 1, 2021.

Tips:

• If you are buying any home in Israel, make sure the seller declares to you in the agreement whether he or she is claiming the second alternative exemption. If so, when do you need to start living in the home? • If the home needs decorating or renovating, have an agreement stipulating that the decorator (shiputznik) must finish well before you move in or else compensate you for the penal acquisition tax.

• If you leave it too late, you probably won’t find a decorator who wants the job.

Are they kidding us?

The above package is intended to encourage home owners to sell them in the next year or two. But the package was passed in haste ahead of the Knesset summer recess.

Once the recess is over, the Knesset members will likely debate the housing situation again.

Anecdotal evidence suggests the tightening of mortgages is reducing demand for homes, and the fiscal measures are less understood by people. Non-Israeli investors may not be exempt from tax in their country of residence, so the Israeli tax exemption will be less helpful to them anyway.

Overall summary: sale exemptions

The home-sale exemptions have gotten pretty complex. the following is a brief summary of the exemption possibilities.

If the home was used for residential purposes in the four years preceding the sale or 80% of the period of ownership: • Is it the only Israeli home you own? Consider the once-every-18-month exemption.

• Otherwise, if you sell an Israeli home by December 31, 2012: Consider the first alternative sale exemption for up to two homes, to the extent the sale price is no more that NIS 2.2 million; then the once-every-fouryear exemption.

• If you sell an Israeli home after December 31, 2012: Consider the once-every-eightyear exemption.

• Other home-sale exemptions may be available in more limited circumstances: exemption for inherited home; one-time exemption for two small homes sold to buy one large one; sale to buy place in old-age home if over 60 or need care; clearance and reconstruction project up, subject to conditions.

If the home was NOT used for residential purposes in the four years preceding the sale or 80% of the period of ownership: If you sell by June 30, 2013, consider the second alternative exemption for up to three Israeli homes.

To sum up

The Israeli real-estate market is in a state of flux and so is the tax treatment for homes. All Israeli home buyers must check with the seller to determine whether they are exposed to the 15% penal acquisition tax.

As always, consult experienced tax advisers in each country at an early stage in specific cases.

leon@hcat.co

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