The Israeli budget package of laws includes a number of tax changes regarding Israeli real estate.
Purchase tax increase
Until recently, purchase tax applied to purchases of only homes at rates ranging from 0% (up to NIS 1,745,865) to 10% (over NIS 17,825,555) and to people that already own a home at 5% (up to NIS 1,294,770) to 10% (over NIS 17,825,555).
Pursuant to an amendment, commencing November 28, 2021, the purchase tax rates went up for people that already own a home (Real Estate Law (Appreciation and Purchase)(Amendment 98, 2021). The rates for them now range from 8% on the first NIS 5,348,565 and 10% over this level.
The Israeli government hopes this purchase tax rate increase may discourage investment in additional homes and take the heat out of rising property prices. Time will tell.
Tax breaks for “institutional rental buildings”
Going in the opposite direction, amendment 75 to the Law for Encouragement of Capital Investments, 1959 offers tax breaks to encourage mass investment in long term rental homes if they qualify as “institutional rental buildings.”
Before the amendment, more limited tax breaks were already available for new “rental buildings” that meet certain conditions. Briefly, at least half the floor space should be rented out for residential purposes for at least five years in the seven years after the end of construction, and no sale is made of half the floor space until five years of rental have elapsed – unless at least 50 homes are sold.
Approval of the building is needed from the Investment Authority. If only part of a building is involved, it should have at least six homes. In qualifying cases, tax rates for income and capital gains from a “rental building” is 11% for a company and 20% for an individual. That is after deducting 10%-20% depreciation per year. Sales may enjoy exemption from VAT. Other rules also apply.
The latest amendment adds “institutional rental buildings” approved up to the end of 2031. Approval must be requested with a copy of the building permit before the end of construction. There should be at least 10 homes generally, or six homes if the building is in a prescribed peripheral area. Size rules aim to prevent artificial splitting of homes.
THE INVESTMENT Center board must be satisfied that the homes are to be rented out on average 15 years out of 18 years after the end of construction. There are also rules facilitating long term rentals of homes for at least 20 years, but capable of termination annually and each five years by the tenant apparently.
To obtain tax breaks, the homes must be rented out on average five years out of six after rental begins.
Rental and sales gains of companies in qualifying cases may be initially taxed at 11%, potentially decreasing to 9% after five years of rental, 7% after 10 years of rental, 5% after 15 years of rental. Dividends are taxable at 20% subject to any applicable tax treaty.
Rental and sales gains of individuals in qualifying cases may be initially taxed at 29%, potentially decreasing to 27.5% after five years of rental, 25.5% after 10 years of rental, 24% after 15 years of rental.
The five-year rental periods assume rental in five out of each six-year cycle and no sales before the end of the previous five-year cycle.
To preserve future tax breaks after a sale, it seems at least 50 homes must be sold to a purchaser who undertakes to continue with these conditions and is approved by the Investment Authority. The seller or the purchaser must provide guarantees to the Israeli Tax Authority (ITA) to pay the applicable tax plus interest if the conditions for the tax breaks aren’t met.
Sales may enjoy exemption from VAT. Purchasers who continue with these conditions may pay only 0.5% purchase tax on their purchase. Investors with approval for “rental buildings” under the old rules may elect to switch to the new rules for “institutional rental buildings” by the end of 2023. There is another transitional rule enabling the new “institutional rental building tax rates of 11%/29% to anyone who filed a bid in a governmental tender before the amendment was published on November 18, 2021.
There are also new rules relating to real estate investment funds, i.e. Israeli REITs.
The new “institutional rental building” incentives aim for long term rental as an alternative to home purchase.
However, the wording of the amendment seems open to alternative interpretations in some places. We await clarification regarding the terms, sales, vacant/unlet periods, REITs and tax guarantees to the ITA.
As always, consult experienced tax advisers in each country at an early stage in specific cases. leon@h2cat.com. The writer is a certified public accountant and tax specialist at Harris Horoviz Consulting & Tax Ltd.