Your Taxes: Home sweet home

Purchasers of more than one home in Israel might consider waiting until May 6 in the hope that the acquisition tax may go down for them.

Living room 311 (photo credit: Courtesy/Betili)
Living room 311
(photo credit: Courtesy/Betili)
Israelis head for the polls on January 22. Israel prides itself on being a property-owning democracy. On December 18 the Israel Tax Authority announced it had agreed with the Knesset Finance Committee that the expiry of temporary measures to steady home prices will be extended from the end of 2012 to May 5, 2013. These measures were enacted in the Real Estate Law (Increase in Supply of Residential Homes – Ad Hoc Provisions), 2011.
To help you take advantage of this reprieve, here is a summary of the main measures apparently being extended.Home-sale exemptions
Israel has long granted individuals an exemption from land-appreciation tax (i.e., 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 temporary measures include an alternative exemption for two more home sales in the period since January 1, 2011, provided the sale price does not exceed NIS 2.2 million (about $586,000) each. If the sale price is more, a pro rata exemption is available.
In addition, the property 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 since November 1, 2010; 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 capital-gains tax in your home country.
Also, if you sell an Israeli home under the temporary measures and sell another after they expire, 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 50% – to the extent that the real estate was acquired before that date.
For land with rezoning permission, 50% betterment tax may also apply.
These taxes may deter land owners from selling anything.
Consequently, a reduction in the rate of land-appreciation tax to a maximum of 25% (instead of up to 50%) for real-estate sales has been legislated, which will mainly apply to land.
The seller should be an individual.
The real estate should be purchased in the period from April 1, 1961, to November 6, 2001. The real estate should be sold in the period between November 15, 2010, and the expiry of the temporary measures. At the time of the sale, there should be planning permission to build at least eight homes.
Within 36 months after the sale, the construction should be completed for eight homes or 80% of the planned homes, whichever is higher. The sale should not be without consideration, nor to a relative. No other tax exemption or reduction should apply.Acquisition tax dual rates
Purchasers of Israeli real estate pay acquisition tax. Before the temporary measures, the maximum rate was 5%.
To dampen demand, the acquisition rates were ramped up, especially for those who already own another home in Israel. Here are the acquisition tax rates in the period February 21- December 31, 2011:
• For an individual who has no other home in Israel, the acquisition-tax rates are more lenient: first NIS 1,421,760 – 0%; NIS 1,421,760 to NIS 1,686,395 – 3.5%; above NIS 1,686,395 – 5%.
For these purposes, an “individual” is defined as: a purchaser and his spouse (unless they are permanently separated); and their children under age 18 (unless married).
• For individuals with another home in Israel, the acquisition rates are steeper: first NIS 1,053,200 – 5%; NIS 1,053,200 – 3,159,600 – 6%; above NIS 3,159,170 – 7%.
New immigrants still qualify for a 0.5% rate on the first NIS 1,540,855 in the period between one year before immigration to seven years after immigration.To sum up
Housing looks like it will be an election issue and a post-election issue when a new coalition government is formed.
It is important to note that the above is based on the Israel Tax Authority’s announcement. We still await the amendment giving it legal effect. Therefore, it remains to be seen whether and when the amendment will be passed by the Knesset, including its exact terms.
Subject to this, real-estate sellers will be happy that the above tax breaks are expected to continue until May 5.
Purchasers of more than one home in Israel might consider waiting until May 6 in the hope that the acquisition tax may go down for them. Such tax tactics may perhaps contribute to uncertainty in the Israeli real-estate market in the short term.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.