Could you be entitled to land appreciation tax refunds?

The majority of people conducting real estate transactions in Israel, including non-Israeli residents, are not aware of the fact that they may be entitled to land appreciation tax refunds.

Calculating taxes (photo credit: INGIMAGE)
Calculating taxes
(photo credit: INGIMAGE)
A 2015 report issued by the state comptroller and ombudsman of Israel with regards to land appreciation tax stated the following:
“Each year, there are about 25,000 real estate transactions that are subject to Land Appreciation Tax payments at an average of 1.75 Billion NIS per year. Only a minority of people that paid Capital Gains Tax have requested to “spread” or “reallocate” the capital gains, which, for some of those people, resulted in a reduction in Land Appreciation Tax.”
The conclusion derived from the aforementioned extract, from the State Comptroller and Ombudsman’s Report, is that the majority of people conducting real estate transactions in Israel, including non-Israeli residents, are not aware of the fact that they may be entitled to land appreciation tax refunds in considerable amounts.
Land appreciation tax in Israel
Land appreciation tax (mas shevach in Hebrew) is levied on a real estate property seller in Israel in accordance with the Land Taxation (Land Appreciation and Purchase) Law 1963 (hereinafter: the “Law”). In principle, the tax is imposed on the profit (capital gains) from the sale of property, i.e. the difference between the selling price of the property and its purchase price (less any depreciation claimable).
Land appreciation tax rates are determined according to the periods in which the land appreciation accrued. An individual, (not a corporation), selling non-residential real estate is generally subject to the following tax rates and periods: land appreciation accrued until November 6, 2001, is generally taxed at rates up to 50%; land appreciation accrued from November 7, 2001 until the December 31, 2011 is generally taxed at 20%; land appreciation accrued from January 1, 2012, is generally taxed at 25%.
An Israeli citizen, as well as a non-Israeli resident selling a residential apartment is granted a linear tax reduction. This means exemption for land appreciation accrued until December 31, 2013, calculated on a time-apportionment basis. Any land appreciation accrued from January 1, 2014 onward is generally taxed at rate of 25%.
There are circumstances in which an individual may be exempt from land appreciation tax when selling a home in Israel.
Generally, non-Israeli residents are not entitled to land appreciation tax exemptions for the sale of a home in Israel unless they can prove that they do not own a home in their country of residence.
What is land appreciation “spreading” and how does it assist in obtaining land appreciation tax refunds?
Land appreciation “spreading” (sometimes called “top slicing relief”) means spreading the land appreciation sum for a period of up to four years back and then each year calculating the gains accrued in accordance with the individual’s income tax rates as opposed to the land appreciation tax rates.
If an individual is at least 60 years old, then his income tax rate may start at a rate of 10% (depending on the individual’s income).
If an individual is less than 60 years old, then his income tax rate for these purposes generally begins at 31%.
Therefore, if the seller is at least 60 years old with relatively low income in Israel, “spreading” may considerably reduce the land appreciation tax.
If the seller is under 60 years old, then spreading may be beneficial if the property is not a residential property (such as land, an office or a shop) and was purchased prior to November 7, 2001 (with land appreciation tax rates ranging up to 50%).
Foreign resident investors should, of course, also check their tax position back in their country of fiscal residence.
Time limit for electing spreading
If a seller did not initially elect spreading when selling an Israeli property but now wants to do so, the tax assessment can be amended up to four years from the date the tax authorities issued a final land appreciation tax assessment.
Therefore, a land appreciation tax assessment regarding a transaction signed in the past four years could be amended in order to include land appreciation “spreading.” Such spreading might result in a considerable land appreciation tax refund in relevant circumstances and may be worth checking out.
As always, consult experienced tax advisers in each country at an early stage in specific cases. The writers are Israeli real estate attorneys. Nicole Levin is also an expert on Israeli historic buildings.;