You have decided that the time has come for you to sell your apartment or house in Israel. Whether it’s your primary home or a real estate investment, there are some important questions you need to ask your real estate attorney before moving forward with the deal.
- Will I need to pay any Capital Gains Tax on the sale?
The answer to this is possibly. All real estate transactions must be reported to the tax authorities and sellers may be liable to pay Capital Gains Tax (CGT, called mas shevach in Hebrew).The reason that this answer is not a simple yes or no is that this area of the law is very complex and each situation must be examined individually. Here are a few examples:
Example 1: The sale is of a residential apartment and this is the only apartment owned by the seller. The seller has not sold another apartment in the last 18 months for which he claimed an exemption from Capital Gains Tax.
In this case the seller can claim an exemption from CGT.Example 2: The seller owns more that one apartment and he has not sold another apartment in the last 4 years with an exemption from Capital Gains Tax.
In this case the seller can claim an exemption from CGT.Example 3: The seller owns more that one apartment and he sold one of these apartments in the last four years with an exemption or the seller’s spouse or minor child sold an apartment in the last four years with an exemption.
In this case the seller cannot claim an exemption from the CGT.Example 4: The seller sold an apartment that was under construction, before a certificate of completion was issued.
In this case the seller can claim an exemption from CGT.Example 5: The seller gifts an apartment to a close relative without requiring any payment.
In this case the seller can claim an exemption from CGT.Example 6: Legal rights to an apartment are transferred as a result of inheritance.
In this case there is no CGT to pay.This is a very complicated area of law and the above examples by no means cover all the issues. It would be prudent to ask your real estate attorney about any possible CGT liability in your particular situation. A mistake in this area could prove costly.
- Should I take advantage of an exemption in the Capital Gains Tax even if I am entitled to it?
Once again, the answer is possibly. Essentially it depends on whether or not you have made a profit on the sale. If you are not making a profit then the CGT will be zero. If this is the case there is no point in “wasting” an exemption. Your real estate attorney can do the calculation for you to determine the best option in your situation. - If I would like to sell more than one apartment in the near future how do I know when to ask for the exemption?
If this is the case, you and your real estate attorney have to do a bit of tax planning. You need to know how much the tax will be in each transaction. This will help you determine if it is economically viable to be selling that particular apartment.If you have no choice and need to sell the apartments immediately, determining the tax liability on each one will allow you to figure out for which transaction to request the exemption and for which you will elect to pay the tax. It is possible to request that the contract contain a clause requiring the purchaser to pay the CGT, but if the purchaser refuses then the tax must be paid by the seller.
- What other taxes should I, as the seller, be aware of?
If there has been a change in the zoning laws which give the property extra building rights or which enhance the property in any way then there is a betterment tax (in Hebrew – “Hetel Hashbacha”).This is a one-time tax payable for the change of zoning. It is paid when the property is sold or when the owner asks for a building permit to build an addition to the property, thereby using the new building rights.
An assessor will estimate how the property is enhanced due to the change in the zoning. The assessment will determine what the property is worth as a result of this enhancement compared to what it was worth before the change in the zoning. The betterment tax is 50% of the rise in the worth of the property as a result of the enhancement. This can work out to be a significant amount of money, so you should always ask about betterment tax before you sign the contract.
All municipalities will give you a letter stating whether or not betterment tax applies in this particular sale. If it does, you should consult with an assessor or have the municipality’s assessor asses the tax. It is possible to demand that the purchaser pay this tax.
- Do I have to make any payments to the Israeli Land Authority (Minhal M’kark’ai Yisrael)?
If the land is not privately-owned land, but rather owned by the government (as most of the land in Israel is), then a payment to the Israel Land Authority may be required. In most cases there is nothing to pay but this is an issue that your real estate attorney must check for you. - What do I do with my mortgage when I sell my property?
The answer to this question depends on your future plans. If you are purchasing another apartment, then the existing mortgage can be transferred to the new property. When this happens, the registration of the mortgage on the current property will be erased. This is called in Hebrew “grirat mashcanta.”Your real estate attorney must check with your mortgage bank to find out what the bank’s conditions for this are because it will have an affect on the payment schedule.
If you do not intend to purchase another apartment then you will have to pay off the mortgage with the money you receive from your buyer or with your own funds if you have them. (This is called “siluk mashkanta”.)
If you intend to buy an apartment in the future but have not yet found the property you want to buy, you can freeze the mortgage and transfer it to the new apartment after you sign the purchase agreement. Again, your real estate attorney should find out what the bank’s conditions are for this, too, as it will also affect the payment schedule. (This is called “hakpa’at mashcanta”.)
As you can see, selling an apartment can be fraught with legal hurdles. Sellers can find themselves liable for taxes or in breach of contract if they are not completely clear about their tax and mortgage obligations. For further information and to clarify your own situation, consult an expert real estate lawyer.
