(photo credit: courtesy)
They say an Englishman’s home is his castle, which conveys an air of stability.
The present Israeli housing boom seems anything but stable. Will investors get
burnt if interest rates rise? Will newly-weds have anywhere affordable to live?
To stem the sharp surge in property prices and boost housing supply, the Israeli
government has decided to act. In addition to monetary steps by the Bank
of Israel to rein in housing credit, the government has resolved to adopt fiscal
measures to boost supply and depress demand for homes in Israel. On January 5,
2011, a draft tax bill was circulated for comment which we summarize below. Note
that these measures are still proposals which have yet to be legislated. It
remains to be seen what will finally be passed and when.
Your Taxes: Company car annual tax overhaul Tax on a home
Under current legislation, an individual is exempt from Israeli land
appreciation tax (capital gains tax applicable to real estate) on the sale of
one Israeli home every four years if the seller owns more than one home in
Israel.Otherwise, subject to a few exceptions, 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.
That tax can deter people
from selling. So now it is proposed to grant tax exemption to the sale of
a second home in Israel in 2011 or 2012 to encourage sellers to sell more homes
onto the market.
Only the first NIS 3 million of sale of the value would
be exempt under the proposals – any excess will be taxed on a pro rata basis.
For example, if the sale value is NIS 4m., only 1/4 (NIS 1m. excess sale
value / NIS 4m. total sale value) of that tax would be payable.
exemption at all would apply under the proposals if: (1) the seller was gifted
the home without consideration in the period November 1, 2010 to December 31,
2012, or (2) the home is sold to a relative. These restrictions are meant to
prevent scheming taxpayers with more than two homes passing them around to
others to sell.
If only part of the home is sold, the NIS 3m. exemption
would be reduced pro rata. Also the home must be a qualifying home, which is one
used for residential purposes in the four years preceding the sale or 80% of the
period of ownership Tax on a home purchase
Another proposal concerns acquisition
tax paid by purchasers of real estate. Currently the rate of acquisition tax
ranges up to 5% of the value of Israeli real estate purchased. With a view to
dampening down the demand for homes, it is proposed to impose acquisition tax on
a home in the period January 16, 2011 to December 31, 2012 as follows: 5% on the
first NIS 1m., 6% on NIS 1m. - 3m., 7% above NIS 3m.What does all this
If the proposals are implemented, the combination of supply and demand
measures on the tax front may perhaps help bring down home prices in
Israel. If you are a foreign (non-Israeli) investor, check also the tax
effect in your home country. For example, investors from the US, UK and Canada
(to name a few places) may enjoy the new proposed Israeli land appreciation tax
exemption, only to pay more capital gains tax in their home country if there is
no Israeli tax to credit.
So foreign investors are probably indifferent
regarding sales. Investors everywhere may be deterred by the increased
acquisition tax, unless they are investing for the long-term and expect to make
sufficient overall gain to recover the cost of their investment, including the
new tax. And this may not take very long for foreign investors, given the
current strength of the shekel.
As always, consult experienced tax
advisors in each country at an early stage in specific
Leon Harris is a certified public accountant and tax
specialist at Harris Consulting & Tax Ltd.