Your Taxes: Home sweet home

Israeli home prices are rising steadily, so new measures have been enacted that aim to increase supply and reduce demand.

311_moshave home (photo credit: Courtesy)
311_moshave home
(photo credit: Courtesy)
Israeli home prices are rising steadily, so new measures have been enacted that aim to increase supply and reduce demand. They are not the same as previously reported proposals.
Home-sale exemptions
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.
On February 16, the Knesset passed the Real Estate Law (Increase in Supply of Residential Homes – Ad Hoc Provisions), 2011.
There is now an alternative exemption for two more 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.
The home also 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. All ownership rights to the home must be sold.
But the exemption also does not apply to any part of the sale price that is deemed to apply to additional building rights. If only part of the home is sold, the NIS 2.2m. exemption cap is reduced pro rata.
To prevent tax planning by passing homes around, this exemption does not apply to: (1) the sale of a home that was acquired by way of a gift in the period from November 1, 2010, to the end of 2012; or (2) a sale to a relative.
This exemption is fine for Israelis, but if you are a foreign investor, you may still be liable to capitalgains tax in your home country.
Also, if you want to sell an Israeli home in 2011- 2012 and want to sell another after those years, it seems you may have to wait four years after the first sale to qualify for a further exemption.
Land-release incentive
When no tax exemption applies, land-appreciation tax is imposed on sales of Israeli real estate at the rate of 20%, if it was purchased on or after November 7, 2001. But land-appreciation tax is imposed at the individual’s marginal tax rate (i.e., up to 45%), to the extent that the real estate was acquired before that date. And for land with rezoning permission, 50% betterment tax may also apply. These taxes deter land owners from selling anything.
Consequently, a reduction in the rate of land-appreciation tax to a maximum of 20% (instead of up to 45%) for real-estate sales has been legislated, which will mainly apply to land. The seller must be an individual. The real estate was purchased in the period from April 1, 1961, to November 6, 2001. The real estate is sold in the period from November 15, 2010, to the end of 2012.
At the time of the sale, there is planning permission to build at least eight homes. Within 36 months after the sale, the construction is complete for eight homes or 80% of the planned homes, whichever is higher. The sale must not be without consideration (sale price), nor to a relative. No other tax exemption or reduction applies.
Acquisition-tax increases
Purchasers of Israeli real estate pay acquisition tax. Until now the maximum rate was 5%. To dampen demand, the acquisition rates have just been ramped up, especially for those who already own another home in Israel. Following are the acquisition-tax rates for the period February 21-December 31, 2011.
For people who have no other home in Israel, the acquisition-tax rates are more lenient: first NIS 1,350,000 – 0%; NIS 1,350,000 to NIS 1,601,210 – 3.5%; above NIS 1,601,210 – 5%.
For people with another home in Israel, the acquisition rates are steeper: first NIS 1m. – 5%; NIS 1m.- NIS 3m. – 6%; above NIS 3m. – 7%.
New immigrants still qualify for a 0.5% rate on the first NIS 1,463,035 in the period between one year before immigration to seven years after immigration.
Other measures
A separate amendment makes reforms of a more technical nature commencing March 31, 2011 (Amendment 70 to the Real Estate Tax Law).
For nonresidential real-estate deals in Israel, upon paying 40% of the sale price, the purchaser must withhold tax at the rate of 15% of the sale price (not the gain), if the real estate was acquired before November 7, 2001, and at the rate of 7.5%, if the real estate was acquired since that date.
When indexing the cost, the last known consumer price index (CPI) data will be used (instead of waiting to know the CPI data for the month in which the deal was done).
Real-estate self-assessment tax returns will now need to be filed within 40 days (instead of 30-50 days), and the tax must generally be paid within 60 days. The Israel Tax Authority must notify the seller about the tax due within 20 days after the self-assessment is filed and has eight months to open the self-assessment.
The taxpayer can appeal within 30 days and the ITA then has another eight months, generally, to respond; it can take another four months for “special reasons” approved by the ITA director.
To sum up
The government is keen to use fiscal measures to take the edge off Israeli home prices. Some say prices have already peaked, in which case the fiscal measures may well work. Time will tell.
As always, consult experienced tax advisers in each country at an early stage in specific cases.
[email protected] Leon Harris is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.