The Israeli property appreciation tax can be very costly under some consequences. There were times when profits from a property transaction in Israel were taxed at 48%. That, by no means, is pocket money. In this guide I will try to explain the ins and outs for the Israeli property appreciation tax, and describe some of the ways to legally avoid it.
How does the law define a taxable sale?
The Israeli tax authorities look for three elementary things to happen in order to charge appreciation tax: 1. there was a sale 2. Of a property (or a right in a property) 3. That generated a profit.
The definition of what is a sale is very broad, so let me innumerate what isn't considered a sale: 1. Inheritance 2. Title transfer due to divorce (to one of the sides in the divorce or to the children) 3. Transferring the title to foreclosure, a trustee, custodian, etc.
How does the law define appreciation?
By law, each Israeli property transaction has to be registered. When you sell a property, you report the sale and the sale price. The tax people in Israel do whatever they can to sniff out fraud, as the parties to the deal might report a certain figure, and then transfer funds between them without reporting them. Therefore, if the tax authorities feel the transaction price reported is unreasonable, they might choose to tax the deal as they see fit, and disregard the figure reported. Under normal, fraud-free circumstances, the appreciation in a property is calculated as flowing:
Sales price – Deductable expenses - Purchase price = appreciation.
Example: Let's assume you bought your home in Israel in June, 2002 for $350,000. You spent $20,000 on it: paying purchase tax, a lawyer and a fix-up crew. You then sold it in December, 2007 for $420,000. You taxable gains would have been $50,000. ($420,000 {sales price} – $20,000 {expenses} - $350,000 {purchase price} = $50,000 {taxable profit}
It's important to understand that you are taxed only on the appreciation (profit), not the whole value of the property sold.
As you see, the expenses you claim reduce your tax bill. Here is a general list of what you can claim:
The bad news is the Israeli appreciation tax is very high. Calculating the exact rate is very complicated, and we won't be able to cover this topic. Therefore, it is very important to consult a professional before each sale of a piece of real estate in Israel. Furthermore, make sure you save all the documents and receipts you receive for expenses on your property. You will have to provide proof on all your expenses when the time comes.
After that disclaimer, I guess you still want to get a sense of the rate. Generally speaking, an individual (as opposed to a company or other legal entity) used to be charged up to 48%. This draconian rate was reduced in November 7th, 2001 to 20%. If a property that was owned prior to 2001 is sold, the tax is calculated on a linier basis. For example, if a property was bought in 1995 and sold in 2007, it was owned for 6 years before the reform and 6 years after it. This means half of any taxable appreciation (6 years of ownership) will be taxed at the pre-reform rate, and half at the cheaper post- reform rate. Once again, there are so many exceptions to the rule that you really have to check every case thoroughly to understand what rate you might be charged.
In any event, chances are good that you won't have to deal with calculating those crazy rates at all! The reason for that is that the law provides for a 100% tax exemption under certain circumstances. More about this all important tax exemption in Part 2.
© Noam Levy is the founder of Tzor Real Estate Ltd. (https://www.tzor.co.il), which offers a unique buying service for buyers who reside outside of Israel.
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