Are you entitled to a land appreciation tax exemption?

Land Appreciation Tax (“Mas Shevach” in Hebrew), is levied on sellers of real estate in Israel on their profits from the sale. Land Appreciation Tax rates can vary between 20% to 47%. The amount of the tax depends on the type of asset being sold, the date it was purchased and the date it was sold.

It is important to note that when the seller has a high income from other sources (i.e. salary) and this income, together with the capital gains accrued in the sale, exceeds the sum of NIS 651,600 (for 2020), he may be asked to add another 3% tax (“mas yesef”) that is paid to the income tax authorities when filing his tax returns at the end of the tax year in which he sold the property.

Among the various exemptions from Land Appreciation Tax allowed by the law, we shall focus here on the most frequently used exemption – on the sale of a residential property. This exemption is, of course, not given for the sale of land or commercial property. In addition to this, the property being sold needs to be used for residential purposes. 

So, for example, if a residential apartment is being used as an office then the seller may lose the exemption.

Once it has been established that the property is indeed a residential property, the seller must meet the following prerequisites in order to obtain the exemption:

First, the seller must sell all of his rights in the residential home.

Second, the seller must be an individual (not a corporation) and an Israeli resident.

If the seller is a foreign resident, then in order to be entitled to the exemption, he must prove that he does not own a residential home in his country of residence.

As far as we know, only Russia and Belgium issue written confirmations that an individual does not own a residential home in that country. Therefore, the Israeli tax authorities have issued instructions indicating how an individual can prove that he does not own a residential home in his country of residence.

Examples include: an affidavit declaring that he does not own a residential home in his country of residence, an agreement showing that he does not own the home in which he resides, confirmation of payment of municipal taxes as a holder (not as an owner) of the home in which he resides in or an approval from the tax authorities in the country of residence, confirming that the individual has not reported income derived from rent of a residential home.

If the individual is a resident of a federal country, such as the US or Switzerland, then the individual has to ascertain that the approval he presents refers to the relevant province or state.

If a seller does not own a residential home in his country of residence, but, in addition to the residential home owned in Israel, he also owns a home in another country which is not his country of residence, he may still be entitled to the tax exemption. since in his country of residence he does not own a residential home.

Third, the residential home being sold must be the “sole residential home” owned by the “seller.”

There are several exemptions to this rule. One instance is the case of an apartment that you inherited or if you own less than 1/3 of an apartment. It is important to plan when you sell which apartment, and which exemption clause you use and when.

Consult your real estate attorney regarding any planning possibilities.

Fourth, the seller has not sold another residential home, using the same exemption, within 18 months preceding the sale of the current residential home.

If the seller has sold another residential home within 18 months preceding the current sale, using a different exemption clause, or using other reliefs, he should not be denied tax exemption for the current sale.

Fifth, the seller must own the residential home at least 18 months from the time construction was completed.

In the sale of a secondhand apartment, the 18-month period begins on the date the sales agreement is signed. If the sale is of an apartment purchased from a contractor, then the 18-month period begins at the date the building is completed.

As of 2020, the exemption is limited to a sales price of NIS 4,522,000. Any amount above that will be taxed.

As always, consult experienced tax advisers in each country at an early stage in specific cases.