By Adv. Etgar Kedem, Adv. Avi Becker and Adv. Nicole Levin
Have You Sold Real Estate in Israel and paid Capital Gains Tax? You may be entitled to Capital Gains Tax refund.
A 2015 report issued by the State Comptroller and Ombudsman of Israel with regards to Capital Gains Tax stated the following:
“Each year, there are about 25,000 real estate transactions that are subject to Capital Gains 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 Capital Gains 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 Capital Gains Tax refunds in considerable amounts.
Before we explain what it means to “spread the capital gains “, Or as it is called in the U.K. “top slicing relief” and in the States ” income spreading” let’s first understand what Capital Gains Tax is.
Capital Gains Tax in Israel
Capital Gains Tax (“Mas Shevach” in Hebrew), also known as “Land Appreciation Tax“, is a tax levied on a real estate property seller in Israel in accordance with the Land Taxation (Appreciation and Purchase) Law 1963 (hereinafter: the “Law“).
In principle, Capital Gains Tax is imposed on the profit (capital gains) from the sale of property. This means the difference between the selling price of the property and the purchase price of the property.
Capital Gains Tax rates are determined according to the periods in which the capital gains was accrued. An individual, (not a corporation), selling real estate (which is not a residential apartment) is subject to the following tax rates and periods:
Capital gains accrued until 6.11.2001 shall be calculated at 47%,
Capital gains accrued from 7.11.2001 until 31.12.2011 shall be calculated at 20%
Capital gains accrued from 1.1.2012 and onwards shall be calculated 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 capital gains accrued until 31.12.2013. Any capital gains accrued from 1.1.2014 onwards shall be taxed at a rate of 25%.
According to the aforementioned law, there are circumstances in which an individual shall be exempt from Capital Gains Tax when selling a residential apartment, subject to that individual meeting certain criteria set out in the law.
Generally, non-Israeli residents are not entitled to Capital Gains Tax exemptions for the sale of a residential apartment in Israel, unless they can prove that they do not own a residential apartment in their country of residence.
It is safe to say that most non-Israeli residents selling real estate in Israel shall be subject to Capital Gains Tax.
So what is capital gains “spreading” and how does it assist in obtaining Capital Gains Tax refunds?
As explained above, Capital Gains Tax rates are relatively high. Capital gains “spreading” means spreading the capital gains sum for a period of up to 4 years and then each year calculating the capital gains accrued in accordance with the individual’s income tax rates as opposed to the Capital Gains Tax rates.
If an individual is at least 60 years old, then his income tax rate may begin at an income tax level of 10% (depending on the individual’s income) as opposed to the very high Capital Gains Tax rates elaborated above.
If an individual is less than 60 years old, then his income tax rate (for purposes of profit incurred in a real estate transaction) shall begin at an income tax level of 31%.
So – if you are at least 60 years old on the day of the transaction with relatively low income or no income at all in Israel (for example – a non-Israeli resident with no income in Israel), capital gains “spreading” may considerably reduce the Capital Gains Tax imposed upon you due to selling any kind or real estate property.
If you are younger than 60 years old, then capital gains spreading may also be beneficial in reducing Capital Gains Tax if the real estate property is not a residential property (such as land, an office or a shop) and has been purchased prior to 7.11.2001 (a period during which Capital Gains Tax rate was at 47%).
It is important to note that capital gains spreading could be very beneficial for a non-Israeli resident since most non-Israeli residents have no income in Israel except, sometimes, income derived from rent.
According to the law, income derived from renting real estate property does not constitute “income” for capital gains “spreading” purposes (providing the rent income itself is exempt from income tax or is at a fixed income tax rate of 10%).
How does it work?
Let’s take an example:
Shimon, a 65 year old non-Israeli resident, who has no income in Israel, sells his residential apartment in Israel in 2020. The capital gains (the profit Shimon derived from the difference between the selling price of the property and the purchase price of the property) is 280,000 NIS.
Since it is a residential apartment then the Capital Gains Tax (without capital gains “spreading”) would be 70,000 NIS (25%*280,000). Now let’s see how spreading is done and how much Shimon can save.
We’ll take the capital gains sum of 280,000 NIS and spread it, evenly, throughout the current year of the transaction and 3 years prior to the transaction (since capital gains spreading could be done up to 4 years, including the year in which the transaction was signed).
Since Shimon has no income in Israel, then his income tax level is at 10%:
2020 – 70,000 NIS – 10% = 7,000 NIS
2019- 70,000 NIS– 10% = 7,000 NIS
2018- 70,000 NIS– 10% = 7,000 NIS
2017-70,000 NIS– 10% = 7,000 NIS
Total: 28,000 NIS
Conclusion: Instead of paying Capital Gains Tax in the sum of 70,000 NIS, Shimon shall only pay Capital Gains Tax in the sum of 28,000 NIS, thereby saving 42,000 NIS.
Of course, in transactions where the capital gains is higher, then an individual could save even more money by implementing capital gains “spreading”. In this case the capital gains tax refund will be larger.
Capital Gains Tax Refunds
Most sellers of real estate in Israel, residents as well as non-Israeli residents, have not requested capital gains “spreading” upon submitting their Capital Gains Tax assessment subsequent to their real estate transactions. Now is the time to do so and get a capital gains tax refund.
According to the law, a Capital Gains Tax assessment can be amended up to 4 years from the day the tax authorities have issued a final assessment of the Capital Gains Tax levied on the seller.
Therefore, a Capital Gains Tax assessment regarding a transaction signed in the past 4 years could be amended in order to include capital gains “spreading”. Capital gains spreading could result in Capital Gains Tax refunds in considerable amounts.
If you are a non-Israeli resident, with no income in Israel or have a relatively low income, and have executed a real estate transaction in the past 4 years (and in very exceptional cases even further back) you may be entitled to a large Capital Gains Tax refund.
This article was written by:
Etgar Kedem-Kaufman, Advocate and Notary, a legal consultant in “Btax Land Taxation Ltd” , Abraham Becker, Advocate, founder and owner of “Btax Land Taxation Ltd” and Nicole Levin Adv. owner of Nicole Levin Law offices.
If you would like to find out if you are entitled to Capital Gains Tax Refund Contact us :
Nicole@levinlawoffices.co.il – 972-8-9701355.