The Israeli government on June 8, 2022, published “A Bill of Law to alter the Land Taxation (Appreciation and Purchase) Law 1963” (Bill 1555, hereinafter: “the Bill”).
In this article, we focus on three proposals that may impact non-Israeli residents who own residential homes in Israel.
Land Appreciation Tax (“Mas Shevach” in Hebrew), is a type of capital gains tax levied on sellers of real estate in Israel.
Background – old linear tax
Due to past legislative changes, Land Appreciation Tax rates vary over the period of ownership. This necessitates splitting the total period of ownership pro rata into the respective numbers of days on a “linear” basis. It is a number-of-days arithmetic split without revaluing the property on each date. And that is after adjusting the gain for inflation up to the end of 1993.
An individual (not a corporation) selling non-residential real estate is subject to Land Appreciation Tax on taxable gains at the following rates: gain accruing up to November 6, 2001 – regular rates up to 50%; gain accruing from November 7, 2011 to December 31, 2011 – 20%-23%; gain accruing since January 1, 2012 – 25%-28% (we refer to the above tax rates and rules as the “Old Linear Tax”).
Background – homes in Israel
Under the current law enacted in 2013, Israeli and foreign residents who sell a home in Israel, are granted a “Better Linear Tax Reduction.” This means exemption for the gain accruing up to December 31, 2013, calculated on a time-apportionment basis. Any gain accruing since January 1, 2014, is generally taxed at rates of 25%-28%. There are circumstances in which an individual may be exempt from Land Appreciation Tax altogether when selling a home in Israel. Generally, non-Israeli residents are not entitled to such an exemption, unless they can prove that they do not own a home in their country of residence (but they can rent).
The Bill proposes various changes including:
1. Denying a non-resident the Better Linear Tax Reduction.
This proposal means that a non-Israeli resident selling a home in Israel acquired before 2014, would be required to pay Land Appreciation Tax spanning the entire period in which the gain accrued. In other words, a non-Israeli resident selling a residential home in Israel would be subject to Israeli tax according to the Old Linear Tax rules.
For example: Suppose an individual bought an Israeli home on January 1, 1990, for NIS 100,000 and sells it now for NIS 2,000,000. If that person is granted the Better Linear Tax Reduction, he would pay Land Appreciation Tax of approximately NIS 105,000. However, if that person is taxed according to the Old Linear Tax rules, he would pay Land Appreciation Tax of approximately NIS 515,000.
2. No sale exemption at all – This is proposed for a non-Israeli resident, even if that person does not own a home in his country of residence. This proposal means a non-Israeli resident would be required to pay Land Appreciation tax under the Old Linear Tax rules.
3. No rental exemption – According to the current law, if a person rents out one or more homes in Israel and the total monthly rent does not exceed NIS 5,196 (in 2022), that person may be exempt from Israeli income tax thereon. The Bill proposes to deny this exemption to a non-Israeli resident.
The Bill proposes to introduce these amendments on 1st of January 2024.
It seems these proposals might be considered discriminatory under Israel’s tax treaties.
With regards to purchase tax, no change is proposed in the Bill. A non-Israeli resident purchasing a residential home would generally remain subject to purchase tax ranging from 8% to 10%.
Furthermore, non-Israeli resident sellers (and US immigrants) should check whether they are liable to tax in their home country and whether they can claim a credit for the Israeli tax under a tax treaty with Israel or domestic tax law in the home country.
To conclude, if you are a non-Israeli resident who owns residential property in Israel, and you are contemplating selling it, it may be wise to consider doing so before the end of 2023.
Please note the Bill is still being legislated and it remains to be seen what will be enacted and when.
As always, consult experienced legal and tax advisers in each country at an early stage in specific cases.
[email protected], [email protected],[email protected], [email protected] The first three writers are Israeli real estate attorneys. Nicole Levin is also an expert on Israeli historic buildings. Leon Harris is a certified public accountant and international tax specialist.