Are You Entitled to Land Appreciation Tax Exemption?
By Attorneys Etgar Kedem-Kaufman, Avi Becker and Nicole Levin
Sometimes you may be entitled to a Land Appreciation Tax exemption. As detailed in our former article, Land Appreciation Tax (“Mas Shevach” in Hebrew), 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“).
Land Appreciation Tax Rates
Land Appreciation Tax rates vary between 20% to 47% depending on the type of asset being sold, the date in which it was purchased and the date in which it is sold.
However, there are certain clauses in the Law, which enable an individual, who meets the requirements set out in them, to be exempt from Land Appreciation Tax when selling a residential home in Israel.
In this Article, we shall focus on one of these exemption clauses, and the most frequently one used – Clause 49b (2) of the Law. In order for an individual to be entitled to Land Appreciation Tax exemption based on clause 49b(2) he must fulfill the prerequisites and requirements demanded in the clause.
Prerequisites for exemption from Land Appreciation Tax
There are two Preliminary requirements (prerequisites) set out in clause 49 of the Law:
- The asset, in its nature, is a residential home (not an office, land or shop).
Over the years, this requirement has been developed by court verdicts. Initially, this requirement was met if the asset contained necessary physical living conditions such as a kitchen, bathroom and toilet. Over time, due to court verdicts, the requirement’s definition evolved to meaning that even if physical conditions are met, if the asset is uninhabitable, then the asset has not met the necessary requirement and its owner shall not be entitled to Land Appreciation Tax exemption. Furthermore, recent verdicts have focused on the fact that the asset being sold is designated by Building and Planning laws as a residential home. So even if an asset has all the physical living conditions and is habitable, if it is not designated by law to be a residential home then its owner shall be denied the tax exemption.
- The residential home has been used, particularly, for residential purposes at least in one of the following periods:
- 4/5 of the period in which the Land Appreciation has accrued.
- 4 years preceding the sale.
For example: a residential home has been purchased on the 1.1.2000 and sold on the 1.1.2020. The land appreciation period is measured throughout a period of 20 years. If, out of the aforementioned 20 years, the residential home has been used as an office for a period of 4 years preceding the sale, but for a period of 16 years prior to that, it has been used for residential purposes, then this requirement has been met.
Additionally, according to clause 49, if the residential home has not been used for any purposes or has been used for education purposes, including a kindergarten or a religious institution, then its owners may also be entitled to Land Appreciation Tax exemption, subject to the owners meeting all the requirements set out in the relevant Land Taxation Regulations.
Other Requirements of the Land Appreciation Tax Law for Exemption
After the two aforementioned prerequisites have been met, then the next step is to check the other demands laid out in clause 49b(2):
- The seller must sell all of his ownership rights in the residential home.
If the seller sells only some of his ownership rights, while retaining the rest of the ownership rights to himself, he shall not be entitled to tax exemption.
- The seller who is an individual (not a corporation) is an Israeli resident.
If the seller is a non- Israeli resident, then in order to be entitled to tax exemption, he must prove that he does not own a residential home in his country of residence.
What proof is needed by Foreign Residents
So far it is known that only two countries, Russia and Belguim, issue a written confirmation stating that an individual, who they serve as his country of residence, does not own a residential home in that country. Other countries do not issue such a confirmation.
Due to the above, the Israeli tax authorities have published a second addition to Execution Order No. 5/2013, indicating means in which an individual can prove that he or she does not own a residential home in his or hers country of residence.
The individual, claiming that he does not own a residential home in his country of residence, should provide the Israeli tax authorities with the following documents:
- An affidavit, in which the individual declares that he does not own a residential home in his or hers country of residence.
- A lease agreement or any other king of other agreement, proving that he is not the owner of the home in which he resides in at his country of residence.
- An approval from the municipality that he pays municipal taxes (similar to “Arnona” in Israel) as a holder of the home he resides in at his country of residence and not as an owner.
- An approval from the tax authorities in the country of residence, confirming that the individual has not reported income derived from rent due to a home which he rents out, alternatively, to produce the individual’s tax report. If the individual receives rent payments from an asset in his country of residence, which is not a residential home, then he needs to present an affidavit declaring that the rent income is derived from an asset which is not a residential home.
Note that if the individual is a resident of a federal country such as the United States of America or a country that is divided into districts such as Switzerland, then the individual has to ascertain that the approvals he presents, refer to him not owning a residential home in each one of the districts or in each one of the states which form the federal country.
It is important to point out that the wording of the law emphasizes the words “country of residence”, so, for example, if an individual’s country of residence is Great Britain and he does not own a residential home there, but, in addition to the residential home he owns in Israel, he also owns a home in Spain (which is not his country of residence) then that individual shall still be entitled to tax exemption (providing he meets all the other requirements set out in the clause), since in his country of residence (Great Britain) he does not own a residential home.
- The residential home being sold must be the sole residential home owned by the seller.
Sole Residential Home According to the Land Appreciation Tax Law
Note that for purposes of the definition of “sole residential home”, an individual may still meet this requirement even though, in addition to the residential home being sold, he also owns one of the following:
- A substitute residential home, purchased 18 months prior to the sale of the current residential home being sold.
- A residential home which is a protected tenancy.
- A residential home which the seller’s ownership rights in it do not exceed 33%.
- A residential home which the seller has inherited up to 50% of its rights (with no relevance to the identity of the legator or the number of residential homes owned by the legator prior to his death).
- A residential home which the seller has inherited providing he is either the spouse of the legator, or his descendant, or a spouse of the legator’s descendant and prior to his death, the legator owned a sole residential home and if the legator was alive today, he would have fulfilled all the requirements of clause 49b(2).
- A residential home, owned by a corporation, in which the seller owns up to a third of its ownership rights, and if the seller inherited his rights in the corporation, then his ownership rights must not exceed 50%.
(The residential homes referred to in aforementioned subsections (2), (3) and (4) shall each be, hereinafter, referred to as a “Derivative“).
- The seller has not sold another residential home, using the 49b(2) exemption clause, 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, for example clause 49b(5) – a tax exemption for a residential home received by way of inheritance, or using Linear Tax Reduction, he shall not be denied tax exemption for the current sale, providing he meets all other requirements.
- The seller must own the residential home at least 18 months from the time its building was completed.
If the sale is of a second hand residential home, the 18 months period commences at the date the sale agreement is signed. If the sale is of a first hand residential home, a home that was bought from a contractor (“Kablan”), then the 18 months period commences at the date the building is completed, meaning the date in which “Tofes 4” is issued by the authorities.
- The residential home being sold, must not have served as a Derivative in the sale of another residential home sold using exemption clause 49b(2).
This final requirement is a bit complicated and so we shall explain it using an example: An individual sold his residential apartment using the exemption clause of 49b(2). At the time of the sale he also owned a third (33%) of another residential home. If, at a later time, that individual should wish to sell his rights in the residential home that he owns a third (33%) of, he will not be able to do so using the exemption clause of 49b(2) in the sale.
Above all of the aforementioned requirements, it is important to be aware of the fact that the exemption is limited to a certain sum which is updated each year. For the year 2020 the sum is 4,522,000 NIS. So, if the residential home being sold is at the price of 5,000,000 NIS, then out of the aforementioned sum, only 4,522,000 NIS shall be exempt from Land Appreciation Tax and the difference (478,000 NIS) shall be entitled to Linear Tax Reduction.
Also note that if the residential home being sold has additional building rights attached to it (e.g, further rights to build an attic or a basement, etc) then, depending on the circumstances and the value of the additional building rights, these building rights may not be exempt from Land Appreciation Tax but rather taxed at a rate varying from 20% to 47%, subject to the purchase date of the residential home.
The writers are Israeli real estate attorneys.
Nicole Levin is also an expert on Israeli historic buildings