Legal Ground: Foreigners and luxury-home owners: Red light ahead!

Do you spend a lot of time both in Israel and abroad? In today’s global world, classification of foreign and Israeli residents isn’t always clear and simple.

Houses for sale in California, real estate 370 (photo credit: REUTERS)
Houses for sale in California, real estate 370
(photo credit: REUTERS)
Over the past few months, more than a few well-known highend homes were placed on the market for sale in Israel. This comes as a natural reaction to the tax reform, and we can expect to see this trend continue into 2014.
Lord Michael Levy, for one, was reported to have sold his NIS 23.3 million home in Herzliya Pituach this past summer. Another home in the same locale, owned by a Russian businessman, was recently placed on the market for NIS 100m.
But even those with far more modest homes are impacted by this extensive and unprecedented reform. The new rules institute a tax-exemption ceiling of NIS 4.5m., which means that even if you are eligible for an exemption from appreciation tax, the full exemption is only applicable to apartments sold for NIS 4.5m. or less. Any payment received for the sale of a home beyond this amount will be liable to appreciation tax of 25 percent.
Am I too late?
This aspect of the reform goes into effect on January 1, 2014, which is why many have been eager to sell before the end of the current year.
However, if you would like to minimize your tax liability, it is still not too late. Appreciation tax will only apply to the capital gains or appreciation that you have accrued within the period beginning on January 1 and onward, subject to certain conditions.
For example, a home that was purchased for NIS 4m. on January 1, 2012, and which will be sold on January 1, 2015, for NIS 7m., will have appreciated by NIS 3m. The home was owned for three years, and the yearly appreciation rate is therefore NIS 1m. Two of these years were prior to 2014 and therefore may enjoy the tax exemption. The amount of appreciation liable to tax is NIS 1m., at a rate of 25%; i.e., taxes due would be NIS 250,000.
However, if this same home were to sell for the same price just half a year earlier, on July 1, 2014, then our calculation would be altered as follows: The appreciation amount of NIS 3m. would be distributed over 2.5 years, at a yearly appreciation rate of NIS 1.2m.
However, because the home was only owned for half a year after 2014, the appreciation attributed to that period would be just NIS 600,000, for which the tax due (25%) would be NIS 150,000.
It is thus clear that selling sooner after January 1, 2014, results in lower appreciation tax. This is not to say that everyone should run out and place their home on the market, since each person has their own individual circumstances. However, if you were considering selling over the next few years, it is worthwhile to make the calculations regarding the tax benefits of selling sooner rather than later.
Foreign residents no longer exempt
Notably, there is another reason the luxury homes mentioned earlier were put on the market: Both sellers are foreign residents. Until today, foreign residents were able to enjoy the “single apartment” exemption afforded Israeli residents. If the seller owned only one home in Israel, he or she would be eligible for the exemption, under certain terms. However, that is set to change now as well.
Any foreign resident who owns a home in his country of residence will no longer be eligible for an exemption from appreciation tax, even if he or she owns just one home in Israel. Furthermore, the law stipulates that the way to prove you don’t own a home in your country of residence is by providing the Israeli authorities with a formal confirmation proving as much from the foreign tax authorities.
How exactly one would go about getting such a confirmation, and what type of confirmation would be acceptable, remains to be seen. As such, all foreign residents are currently deemed to be home owners in their countries of residence. Therefore, they will not enjoy the tax exemption, until they prove that they don’t own any property in the country of residence.
The rationale behind this change is twofold: Firstly, Israelis owning more than one home in Israel will no longer be entitled to the appreciation-tax exemption. Allowing foreign residents who own additional homes abroad to enjoy the exemption would create an imbalanced advantage for foreign residents.
Secondly, foreign residents who enjoyed the exemption until now were still liable to pay capital-gains tax in their country of residence.
These foreign countries were benefiting from gains and profits made in Israel, while the State of Israel missed out on this source of income. Starting in 2014, these tax monies will be redirected into Israeli government coffers.
Since in most cases foreign residents will not be subject to double taxation, and since tax will have been paid in Israel, they won’t be taxed again in their countries of residence.
Do you spend a lot of time both in Israel and abroad? In today’s global world, classification of foreign and Israeli residents isn’t always clear and simple.
But that’s a topic for a separate column.
The above provides general information only, and detailed advice must be obtained prior to any action taken.
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Dr. Haim Katz, a senior partner in a law firm with offices in Tel Aviv and Jerusalem, specializes in real estate, inheritance, international trusts, commercial and family law. Sam Katz is a jurist who lives in Jerusalem.