By Adv. Etgar Kedem-Kaufman, Adv. Nicole Levin and Adv. Avi Becker
A recent proposal to change the Land Appreciation Tax Law may have dire affects on foreign owners of Israeli real estate.
On January 2022, the Israeli Knesset published “A Memorandum of Law to alter the Land Taxation (Appreciation and Purchase) Law 1963” (Hereinafter: “the Memorandum“). The Memorandum includes substantial amendments to the taxation of residential homes for the purpose, according to the Israeli tax authorities, of preventing and altering various distortions to the law and to abolish unjustified exemptions or reductions pertaining to taxation of residential homes.
In this article we shall focus on one suggested alteration that has a direct impact upon non- Israeli residents who own residential homes in Israel.
The Memorandum is currently still undergoing legislation process and has yet to be enacted into law.
Land Appreciation Tax (“Mas Shevach” in Hebrew), is a form of capital gains tax levied on a seller of real estate in Israel. In principle, Land Appreciation Tax is imposed on the profit (capital gains) from the sale of real estate. This means the difference between the selling price of the property and its purchase price (less any claimable deductions).
Land Appreciation Tax rates are determined according to the periods in which the land appreciation was accrued. An individual, (not a corporation), selling non-residential real estate is subject to the following tax rates and periods: land appreciation accrued until 6.11.2001 shall be calculated at rates up to 50%, land appreciation accrued from 7.11.2001 until 31.12.2011 shall be calculated at 20%, land appreciation accrued from 1.1.2012 and onwards shall be calculated at 25% (the above-mentioned tax rates shall be referred to herein as “Old Linear Tax“).
An Israeli citizen, as well as a non-Israeli resident, selling a residential apartment, is granted a Better Linear Tax Reduction. This means exemption for land appreciation accrued until 31.12.2013 calculated on a time-apportionment basis. Any capital gains accrued from 1.1.2014 onwards are generally taxed at rate of 25%.
There are circumstances in which an individual may be exempt from Land Appreciation Tax when selling a home in Israel. Generally, non-Israeli residents are not entitled to Land Appreciation Tax exemptions for the sale of a home in Israel, unless they can prove that they do not own a home in their country of residence.
As aforementioned, non-Israeli residents, who own a home in their country of residence are denied land appreciation tax exemptions, but, until now are still entitled to a Better Linear Tax Reduction.
The Memorandum published, suggested, amongst other suggestions for changes to the tax, to amend the existing Law and deny a non -resident Better Linear Tax Reduction. This means that a non-Israeli resident, selling a residential home in Israel, which was acquired before 2014, shall be required to pay Land Appreciation Tax for the entire period in which the land appreciation was accrued. In other words, a non-Israeli resident, selling a residential home, shall be taxed according to the Old Linear Tax.
For example: A person who bought an apartment on the 1.1.1970 at the sum of 50,000 Israeli Pound (Israeli Lira, the currency in Israel at that period) and today sells the apartment for the sum of 2,000,000 NIS. If that person is taxed according to the Better Linear Tax Reduction, he shall pay Land Appreciation Tax of approximately 65,000 NIS. Whereas, if that same person is taxed according to the Old Linear Tax, he shall pay Land Appreciation Tax of approximately 620,000 NIS.
According to the Memorandum, the suggested amendment shall apply to the sale of residential homes from 1st of January 2024. The date has been set in the future so as to allow non-Israeli residents a chance to sell their residential homes within a time period commencing from today until the aforementioned date. Non-Israeli residents selling their residential apartments in Israel within this time frame shall still be entitled to Better Linear Tax Reduction.
In conclusion, if you are a non -Israeli resident, who owns a residential apartment in Israel, as well as a residential apartment at your country of residence (and therefore denied the exemption) and you are considering selling it, it would be wise to do so before January 1, 2024.
As stated at the beginning of this article, it is important to note that the memorandum has not yet passed the Israeli Knesset.
As always, consult experienced tax advisors in each country at an early stage in specific cases.
The writers are Israeli real estate attorneys.
Nicole Levin is also an expert on Israeli historic buildings