The influence of the family unit on real estate taxation
By Adv. Etgar Kedem-Kaufman, Adv. Avi Becker and Adv. Nicole Levin
The influence of the family unit on real estate taxation is an important point to understand. As a general rule, real estate transactions in Israel are subject to the following taxation: Land Appreciation Tax, which is levied on the seller, and Purchase Tax, which is levied on the purchaser.
However, the law grants exemptions or reductions to individuals buying or selling real estate, providing these individuals meet the criteria set out in the various exemption or reduction clauses in the law.
These exemptions or reductions are granted, at times, based on the number of residential apartments owned by the entire family unit. According to the law, a “Family Unit” consists of the seller or buyer (depending on the transaction), his or her spouse and their minor children.
The following examples show the impact of the family unit on real estate taxation:
- A couple plans to sell their family home. In addition to the family home, the husband owns a home which he bought prior to the marriage and which is registered solely in his name, whereas the wife does not own any additional home. Will the wife be denied Land Appreciation Tax exemption on her half of the family home solely because the family unit contains an additional home owned by the husband?
- A couple plans to purchase their first family home. In addition to the family home that the couple intends to buy, the wife owns a home which she bought or inherited, either before or after the marriage. Will the husband be denied lower purchase tax on his half of the home to be purchased, solely because the family unit contains an additional home owned by the wife?
- Each spouse separately owns a home and both intend to sell their homes. Will they both be denied Land Appreciation Tax exemption, separately, on each of their homes solely because the family unit contains two homes?
Over time, society has moved away from the traditional custom of a couple purchasing their first family home subsequent to the marriage and we live in an age where there are more second marriages and relationships where each spouse “brings” into the marriage or relationship a residential home from a previous chapter in his or her life. This reality impelled lawmakers to adapt the law to reflect these new social changes.
Recent judicial verdicts have laid down two general stipulations, which, if met, may entitle an individual to an exemption or reduction in real estate taxation, regardless of the additional home contained in the family unit:
1. A prenup which determines a separation of the couple’s assets, and
2. There is, in fact a separation of assets.
Firstly, the verification of the prenup must be done according to the law. Does the prenup need to be signed prior to the marriage or relationship? Not necessarily. The courts have recognized a prenup signed some years after the marriage and in close proximity to the real estate transaction but before the transaction was signed.
As for the second stipulation: the couple have, in fact, implemented the prenup agreement and the separation of assets has been maintained and the spouse which does not own the additional home does not benefit from it. The tax authorities shall consider all the circumstances surrounding each situation, including the following:
Does the spouse, who does not own the additional home, live in the additional home, together with the spouse that owns it, rent free? Did both spouses contribute financially to the purchase of the additional home owned solely by only one of them? Did both spouses contribute to the payment of a mortgage on the additional home owned solely by only one spouse? Is the rent from the additional home, owned only by one spouse, deposited in the couples’ common bank account?
Let’s return to the three examples mentioned above. If the tax authorities are satisfied that the two stipulations, set out above, and other legal requirements are met , they may decide the following:
Example 1: To grant the wife land appreciation tax exemption as to her half in the common family home, whereas the husband shall be required to pay land appreciation tax on his half.
Example 2: To grant the husband a lower purchase tax on his half in the purchase of the common family home, whereas the wife shall be required to pay a higher purchase tax on her half.
Example 3: To grant each spouse land appreciation tax exemption regarding each of their homes so that both homes are sold tax free.
It should be noted that the definition of a “family unit” pertains also to unmarried couples and same sex couples.
The writers are Israeli real estate attorneys.
Nicole Levin is also an expert on Israeli historic buildings