New Trends in Israeli Real Estate

The past few years have seen a lot of changes on the Israeli Real Estate scene. Economic catastrophes elsewhere in the world have acted as catalysts for change in the mindset of Israelis, the government and lawmakers. Some of these changes will be fleeting but many are here to stay. Most changes have brought improvements, but the jury is still out on the benefits of others. Here are some of the changes:

  1. Purchase Tax: Purchase tax is a tax paid by purchasers when buying an apartment. In the last two years purchase tax for Israelis has been lowered. In fact, it has been lowered so much that purchasers of cheap apartments often get away with paying no purchase tax at all. In some instances it doesn’t pay for an oleh to ask for the partial exemption from purchase tax.In the past, anyone purchasing a second or additional apartment paid a higher rate of purchase tax than those owning only one apartment. The purchase tax for buyers in this situation has been raised even higher over the past two years.

    Foreign residents also used to pay a higher rate purchase tax. However, a treaty between Israel and many countries preventing double taxation caused purchase tax rates for foreign residents to fall. Foreign residents now pay the same rates as Israeli citizens.

    In a recent decision, the tax authorities have begun taxing vacation apartments at a higher rate of purchase tax than that of regular residential apartments.

  2. Capital Gains Tax: This tax, paid by the seller when selling property, has been lowered in recent years.
  3. Betterment Tax: This is a tax on the enhancement of property due to a change in the zoning laws. It is paid by the seller when selling a property or paid by the owner when asking for a building permit. While there has been no change in the actual tax, a change in the appeal process has taken place. The tax is based on the appraisal of the enhancement of the property by an appraiser. In the past one could appeal this appraisal by providing the appraisal of a private assessor. The two appraisers would come to an agreement regarding the correct appraisal. Now these appeals are decided by one of a pool of 10 appraisers nationwide appointed for this purpose.
  4. Changes in linkage of apartment prices: It has long been part of the Israeli mentality to link the prices of apartments to something such as the dollar or the Building Index or even the general Consumer Price Index. This is because for years the Israeli economy suffered from a weak currency and triple digit inflation. Second hand apartments were usually linked to the dollar and new apartments from construction companies were linked to the dollar or the Building Index. This is a phenomenon unheard of in other places in the world. Recently, due to the falling rate of the U.S. dollar against the Israeli shekel, many Israelis have negotiated contracts to buy or sell second hand property in shekels without any linkage. Due to the rise in inflation in the past year, many second hand contracts are still in shekels but are now linked to the Israeli Consumer Price Index i.e. to inflation. Should the dollar begin to strengthen we may expect to see a return to dollar-linked sales agreements for second hand properties.
  5. Changes in the law concerning the purchase of apartments from construction companies at the preconstruction stage: A couple of years ago a large construction company crashed leaving many people in the lurch. There was a real fear that many purchasers, especially those that did not hold viable bank guarantees as the law required, would not get their apartments. In this instance the Bank of Israel stepped in with a series of decisions protecting the purchasers. It was decided that so long as purchasers had deposited their money in the special escrow account set up for the project, their money was protected even though the bank guarantee was not yet issued. In addition to this, the law now requires that all payments to a construction company be made through pay slips directly into the special escrow account, thereby preventing money being deposited in another account by mistake.Additional legal changes have added further protection for purchasers concerning the quality of the construction. The law requires that every contract for the sale of an apartment under construction by a construction company have specifications attached to it. These specs describe what materials the apartment is built of, the number and location of electrical sockets and a myriad of other often small but important details. In the past, the list of specifications was not very specific at all and left a lot of room for the construction company’s imagination. Today the construction company is required to be very specific regarding what materials will be used. This puts a lot of pressure on the construction company to let the purchasers know what type of tiles, sinks and tubs will be installed in the property.
  6. Purchasing Groups: In the past few years we have seen the emergence of property purchasing groups, particularly for new construction projects. A purchasing group is a group of people who purchase the land and build the project themselves. Although, this type of project does not have the protection of the law pertaining to the purchase of apartments from construction companies, many purchasers are drawn to this type of project because they feel that they will save money in the long run. These purchasing groups have become major players on the real estate scene. Whether or not they will continue to pose a challenge to the construction companies remains to be seen.