Changes in Israeli Purchase Tax as a Stimulus for the Israeli Real Estate Market
Changes in Israeli Purchase Tax
Recent changes in Israeli purchase tax may be a stimulus for the Israeli real estate market. The hope is that this will stimulate the Israeli real estate market that was badly hit due to Covid 19.
Every real estate transaction in Israel has at least two taxes. Land Appreciation Tax which falls on the seller and Purchase Tax which is levied on the purchaser. Purchase tax rates vary, depending on the legal entity of the purchaser (whether he or she is an individual, a public institution, a company, etc.), the type of real estate property purchased (residential, commercial or land), and whether the purchaser is an Israeli or foreign resident at the time of the purchase.
The Purchase of Land
In the purchase of land, a shop, an office or a building, etc. the purchase tax rate is 6% of the purchase price. Under certain conditions, the purchaser may be entitled to a partial refund of the purchase tax paid for the purchase of land.
Purchase of a Residential Home
In the case the purchase is of a residential home, the purchase tax is calculated according to tax brackets. The tax is higher or lower depending on the number of residential homes owned by the purchaser’s family cell (a family cell is parents and their minor children) and whether or not the purchaser is an Israeli resident. These tax brackets are updated on the 15th of January each year.
Changes in Purchase tax
Until recently, the purchase tax for foreign residents, or Israeli purchasers with more than one apartment, was considerably higher than the purchase tax for Israeli residents purchasing their sole home. Whereas the first tax bracket for an Israeli resident, purchasing his sole home, started at 0%, the first tax bracket for a foreign resident, or an Israeli purchasing an additional apartment, started at 8%. This made for an enormous difference in the tax.
In July 2020, in the midst of the Covid 19 crisis, the tax brackets were changed, effectively lowering the tax for foreign residents and for purchasers who are buying additional apartments. The first tax bracket was lowered to 5% and only reaches 8% and beyond in smaller stages than before. So therefore, someone purchasing an additional apartment as an investment, or a foreign resident, for the amount of 2,000,000 NIS would have paid 160,000 NIS purchase tax under the old tax brackets and will now pay 107,077 NIS purchase tax under the new tax brackets.
There are some exceptions to the definition of “sole apartment” and so it is recommended to consult with a real estate tax attorney prior to purchasing a residential home. If you have plans to invest in real estate then it is important to consult with an Israeli real estate tax attorney to do some serious tax planning as to when and how to do the real estate transactions. This is important because there can be other tax ramifications involved as well.
If a residential property is purchased from a building contractor but under the sales agreement the contractor is not obligated to complete the inside of the apartment, but rather to leave it as a shell to be completed by the purchaser, then the purchase tax shall be set at 6%.
Partial Exemptions from Purchase Tax
Furthermore, there are some situations which grant an individual a partial exemption from purchase tax. Some examples of this are: a person with disability (subject to the degree of disability), a blind person, a victim of a terror attack, a family member of a soldier who died in the line of duty, a gift to a family member (subject to the definition of a “family member” in the law and regulations).
One of the most common partial exemptions used by foreign residents who intend to make Aliya is the reduction in purchase tax granted to a new immigrant to Israel (an “Oleh Chadash”) providing he meets certain criteria set out in the law.
The partial exemption from purchase tax is granted to an Oleh once for purchasing a residential home and once for purchasing a place of business.
Since, according to the regular tax brackets for Israeli residents, the first tax bracket for the purchase of a sole home, is 0%, it is advisable that the Oleh, purchasing a sole residential home, not use the aforementioned discount for Olim but rather the regular tax brackets for Israeli residents purchasing a sole residential home. For example, the purchase tax for the purchase of a 2,000,000 NIS apartment where the purchaser is entitled to the lower tax brackets will be 8,942 NIS. The tax using the Oleh partial exemption will be 17,262 NIS.
In this case the Oleh can retain the discount given for olim for when he or she purchases another residential home in addition to the first one (providing he or she does so within seven years of making aliya).
By Adv. Etgar Kedem-Kaufman, Adv. Avi Becker and Adv. Nicole Levin
The writers are Israeli real estate attorneys.
Nicole Levin is also an expert on Israeli historic buildings