Israeli Appreciation Tax (Part 2)

So, how do we get the Israeli tax man to drop the dreaded appreciation tax? In the most rudimentary terms, if you own a standard residential property, and you haven't asked for another exemption in the last 4 years – you got it. Now, let's clear up the details.

Israeli Appreciation tax – part two

What exactly is considered a residential property?

The exemption only relate to a residential property as the law defines it. To be considered as such it needs to be all of the following:

1. A residential property (or a part of one)

2. That is not still under construction - fully built

3. Owned by a private person – not a company or other legal entity

4. Is intended for living purposes (has all the amenities needed, such a kitchen, bath room, etc.) or was actually being used for living for either: A. at least 4 year prior to the sale Or B. 80% of the ownership period.

If your property is a standard home, you should have no problem with these criteria. I will not be able to go into more complicated situations, such as what happens when some of the home is used for a small business, etc., in this short article.

What if the property is a gift?

I will however address one issue: what happens if you receive the property as a gift, and wish to sell it. In that case you have to wait a while to get the exemption. Here are the waiting periods:

If you personally live in the property

You need to wait 3 years.
If you got it from a parent – 2 years.
If you are married – 1 year.

If you don't live in the property

You need to wait 4 years.
If it's from a parent – 3 years.

What else has to happen to award the exemption?

Once you've determined your property is considered by law a residential property, you have to comply with all the following prerequisites:

You must actively demand the exemption on a special form when reporting the sale. This the only time you can ask for the exemption!
You must sell all your rights in the property.
If the property was gift, you must wait the periods mentioned above.

How often can you use the exemption?

Well, if you haven't sold a property in Israel property for the last 4 years and you've complied with all of the above, you don't have to pay the tax at all. If you want to sell a second property without paying the tax once more, you'll have to wait 4 more years.

There are several exceptions to the 4 years rule:

If you only owned one property in the 4 year period prior to the sale, you can sell another one within 18 months and get the exemption on the second one too.
If you bought a second property up to 12 months before you sold the first one (you owned 2 properties for that period), with the intention of replacing the new one with the old one – You are considered by the taxman as an owner of only one property and you receive the exemption when selling.
If you inherited the property, the taxman checks if the inheritor would have qualified for the exemption if he or she were still alive. If so, you get the exemption and it doesn't affect the 4 year rule for other properties you own (it's not counted as using an exemption).

To wrap things up, appreciation tax is charged on the profit you make when selling a piece of real estate in Israel. The current level is 20%, yet up to 2001 it was 48%, but it varies by many factors and should be calculated on a case to case basis. If you are simply an individual selling a residential property you own and you haven't used the exemption for at least 4 years –you can pay no appreciation tax. You can also get the exemption under other more special circumstances, which we enumerated. You should note that if you plan on selling more than one property in a period of 4 years or less, you should plan your actions in advance. Try to calculate the profit you expect to get from each sale, and make sure you ask for the exemption on the highest profit sale. That way you minimize your tax consequences to the minimum possible.

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