A Quick Guide To Israeli Property Tax Issues for Foreign Investors

July 28, 2014

By: Mirit Reif, Adv.

The laws regarding the purchasing and selling of property in Israel went through two major changes in August 2013 and January 2014. This article allows a quick summary of these changes relevant to foreign investors:

There are two main tax issues that may occur in a case of a property transaction in Israel:

1. The first is acquisition tax imposed on the purchaser of any type of real estate.

2. The second tax is known as capital gains tax, which is imposed on a seller in case of a profit derived from the sale of a property.

There are additional tax matters with regard to property transactions, however, as long as the transaction does not involve an entity, building rights or undeveloped lands, the only relevant taxes are the two mentioned above.

1. Acquisition Tax

A non Israeli resident is no longer entitled to the low tax rate that is granted for purchase of a single residential property in Israel even though he does not own another one in Israel. The tax rate that will apply will be the same rate that applies for the purchase of an additional home, starting at 5% and up to 10% tax (when the value of the property purchased is over 15 Million Shekels).

However, if within two years of a purchase, one immigrates to Israel by making ALIYA or becoming a תושב חוזר ותיק (an Israeli who resided outside of Israel for at least 10 years), he will be entitled to a tax refund as he will qualify under these circumstances for the reduced tax rate of a single home (the purchaser or his attorney needs to make to request this since it is not automatically given).

The tax rates for foreigners and for Israelis purchasing an additional home are as follows (applicable until December 31, 2014):

Amount

Tax Rate

Up to 1,123,910 NIS
($327,671)*

5%

From 1,123,910 NIS to 3,371,710 NIS
($327,671  to $983,006 (

6%

From 3,371,710 NIS to 4,642,750 NIS
($983,006 to $1,353,570)

7%

From 4,642,750 NIS to 15,475,835 NIS

($1,353,570 to $4,511,910)

8%

Over 15,475,835 NIS

($4,511,910)

10%

If the purchase is by an "Oleh" the tax rates are more favorable

Amount

Tax Rate

Up to 1,644,310 NIS
($ 479,391)

0.5%

Over 1,644,310  NIS
($479,391)

5%

* Using the exchange rate of June , 2014

This exemption can be used starting one year before receiving residency, and ends seven years afterwards.

2. Capital Gains Tax (Mas Shevach)

Capital Gains tax will apply whenever there is a difference between the original purchase price and the current sales price (not including the inflation increase and other recognized expenses such as agent and legal fees, renovations etc.). Capital Gains tax is imposed on a seller of a property on the amount of the appreciation.

The Capital Gains tax exemption which allowed an Israeli resident to sell a residential property once every four years with a full tax relief was canceled on January 1, 2014. The only tax exemption that remains is in a case of an Israeli individual that owns a single home which is his only property in Israel. In this case, he may sell his only home in Israel once every eighteen months with a full tax exemption on any profit gained provided that the value of the property does not exceed 4.5 million shekels.

As of January 1, 2014, foreign residents will receive the exemption from Capital Gains tax mentioned above only if proven that the foreign individual does not own a home in his country of residence. The Israel Tax Authority will accept such a statement only from the tax authorities of the country of residency, otherwise no exemption will apply.

Therefore foreign residents, who own property in Israel in addition to the property they own in their country of residence, will have to pay a Capital Gains tax on any sale in Israel.

If certain conditions are met, the Capital Gains tax will be calculated as follows: the gain until 2014 will not be taxed (provided the taxpayer did not use an exemption for at least 4 years prior to December 31st 2013) and from January 2014 going forward until the actual sale, there will be a 25% tax on the relative gain. This Capital Gains tax calculation is called a "Betterment Tax". Please note that between 2014 and 2017 you can sell only two apartments using the above calculation. All further apartments sold will be taxed via the old way on the full gain from price at purchase until the actual sale (still taking into consideration the inflation increase and other recognized expenses such as agent and legal fees, renovations etc.).

Inheriting a Residential Apartment

Clause 49 B (5) of the Law states that if one receives an apartment as an inheritance, upon selling it, one will be exempt from capital gains tax, even if this is NOT the seller’s only apartment, provided that the following conditions are met:

  1. The seller is the deceased’s spouse, child or child’s spouse;
  2. Before the deceased passed away the deceased had only one apartment in his/her possession; and
  3. Had the deceased still been alive, he would have been able to sell the apartment with a tax exemption.

The purpose for this exemption is to enable the seller to benefit from an exemption that the deceased was entitled to, had he been alive at the time of the sale.

However foreign residents are not entitled to this exemption.

This means, that if a foreign resident inherits an apartment from an Israeli resident, he will NOT be entitled to sell it with an exemption even if he meets the terms above, simply because he is a foreign resident and regardless to whether he owns an apartment in Israel or not.

This discrimination defeats the whole purpose of the exemption and in our opinion is an oversight of the legislator and should be amended accordingly.

If a foreign resident inherits an apartment from an Israeli citizen and he meets the terms stated above, he SHOULD in fact be entitled to the exact same exemption an Israeli citizen receives, simply because the exemption that is passed over originally belonged to the deceased and therefore the foreign residency is of no relevance to the exemption mentioned and should be ignored for this purpose.

We believe that this situation violates anti-discrimination articles that exist under Israeli tax treaties (such as the one with the United Kingdom and the USA) which prohibit foreign residents of treaty countries to be taxed beyond the Israeli local tax requirements and therefore the law should be changed so that foreign residents whether they are purchasing, selling or inheriting an apartment in Israel, should be entitled to the same tax benefits as Israeli residents.

In order to properly benefit and utilize the tax exemptions described in this article, it is strongly recommended to receive advice from an Israeli real-estate attorney familiar with the relevant tax laws. This article is not a substitute for personal and particular legal advice.

Hacohen Wolf is a law firm specializing in Real Estate, Taxation and Commercial Law with offices in Jerusalem, Tel-Aviv, New York, London, Amsterdam and China.