Foreign buyers of Israeli properties: Are the good times over?

For one distinctive group of people, the old days were indeed far better for them then they are today.

money (photo credit: REUTERS)
(photo credit: REUTERS)
Ah! The good old days!
A common human failing that many of us share is the tendency to look back through sepiatoned spectacles at the good old solid, immutable past.
The good old days, when times were simply better than today.
But, as my Uncle Efraim used to say, quoting Simone Signoret, “Nostalgia isn’t what it used to be,” adding cryptically, “and it never really was.”
I could never understand the latter part, but all I know is that the good old days are a bit of an urban myth. The buses never ran on time then, people weren’t politer, and the tax system was not any fairer.
But for one distinctive group of people, the old days were indeed far better for them then they are today.
Those people – and many of them are gathering at our shores for Pessah even as this article is published – are the foreign buyers of Israeli property.
Around 5% of Israeli property is owned by foreign residents. This might not sound like a lot, but if you reckon that many of the foreigners buying here are purchasing at the higher end of the market, it’s easy to see that this involves billions of dollars’ worth of property.
But in the last few years the drop in sales to foreigners has been precipitous and is close to the collapse of the market that took place when Israel was wracked by terrorist attacks in 2003.
There are various logical explanations for this. Firstly, the steep rise in Israeli property prices. Apartments in Tel Aviv now go for the same price that similar apartments attract in London and Amsterdam. Add to that, the drop in the value of foreign currencies, particularly the sterling and the euro, and it’s easy to see why the pool of buyers has shrunk dramatically.
But some of this collapse is government-driven. The message that the government is sending out to foreign buyers is: The good days are over.
And how do governments send out their messages?
By differential taxation.
A foreign resident no longer benefits from the lower tax brackets, which now apply only to Israeli residents.
Until the change in the law, a foreign resident buying in Israel was equal to the Israeli. But since the amendment to the real-estate tax law, only Israeli residents have the right to pay a lower acquisition tax upon purchase. A foreign resident has no such exemption.
To compare: Israeli residents pay upon acquiring a property 0% tax up to a value of NIS 1.6 million, 5% up to the value of NIS 5m. and 8% up to the value of approximately NIS 17m. and 10% over any sum above.
No such break for the foreigner. He pays 8% from the first shekel to about NIS 5m. and 10% on any value above.
How to avoid this higher tax rate?
One way is to come on aliya within a year of purchase of the property. If the purchasers are a married couple, either one of them can become an oleh for the purpose of saving this tax.
The drop in the tax rate is dramatic: Upon the newcomer making aliya, he will now pay tax at the rate of 0.5% for the first NIS 1.6m. and 5% thereafter.
When it comes to the much steeper capital-gains tax (mas shevach), the change in the law regarding foreign buyers is even more pronounced. Until recently, both Israeli and foreign residents were exempt from paying tax on the gain in the value of their property if they sold only one apartment in any four-year period. If the seller had sold more than one apartment during that period, he would have to pay tax on the second apartment.
As Israeli property-market values rose steeply over the years, many foreign residents who had bought here made excellent profits on their resale of property completely tax free.
But today, a foreign resident who wants to sell his property and benefit from the exemption must prove that his apartment in Israel serves as his personal residence and is his sole apartment in the country. Added to that is a new draconian requirement: The foreign resident must prove he does not have an apartment in the country of his domicile!
This means that foreign residents buying a second home in Israel have no exemption from the heavy capital-gains tax.
There are ways of avoiding the punitive capital-gains tax: for example, to be deemed as non-domiciled in the country where you have property abroad.
The higher taxes can thus be legally avoided, but this takes careful planning and forethought.
And so my Uncle Efraim is wrong on this occasion.
It’s not just nostalgia. The good old days for foreign buyers were indeed significantly better than today.
Dr. Haim Katz is senior partner in a law firm based in Tel Aviv and Jerusalem. Sam Katz is a partner in the same firm. Both have written books on inheritance law, family law and real estate and are active in general civil litigation. Shai Tako of our Tel Aviv office contributed to this column.