Tax on appreciation caused by local
legislation (Heytel Hashbacha)
A tax with such a long translated name must be complicated, right? Well, actually it isn't. This tax is charged when the local real estate planning committee changes a bylaw affecting a property. If the change causes an appreciation in the value of the property, the local municipality charges you 50% of the increase in value.
In many cases, the local real estate planning committee approves a new zoning plan that might allow a residential property to be used as a commercial property, or allows the owner to build a bigger structure. For example, you might own a 1/4 acre plot that allows you to build a house of a certain size. The committee might pass a bylaw that says you are now allowed to build a house that's 30% bigger. This new law means your property suddenly is worth more than it used to before the law. That gain caused is what's taxed by this law.
The other cases are when you ask the municipality for a special permission to do something in your property, which is approved. You might own an apartment right in front of the courthouse. You could the municipality for permission to turn it into offices for lawyers. This means your property is suddenly worth more, and you are taxed for that. The difference between the two cases, of course, is that in the first one a general plan affecting the whole zone was passed, and the second one was a specific permission a property received.
When the time comes (as we'll explain in the next paragraph), the municipality calls in a registered appraiser who assess how did the legislation affect the property, and puts a dollar value on it. If you don't agree with the assessment, you can call in an appraiser on your behalf. You then engage the municipality in negotiations to determine the fair value (yes, you're reading correctly!). If can't agree, a third appraiser is called in for a final assessment. Conclusion: if you're looking for a lucrative line of work in Israel, a real estate appraiser is it!
The appreciation is assessed as of the day the new law took effect. This means the question the appraiser needs to answer is: what was the difference in value this law caused? How much was it worth a day before the law took effect, and how much the day after?
The tax is paid when the benefit is actually exercised by the property owner. This happens in one of two cases: 1. you sell the property, and therefore enjoy a higher sales price. 2. You enlarge the property, using the new bylaw or change the way it's used (such as in the office example above). All this means is that you don't have to pay until you actually benefit from the law.
The rate is 50% of the appreciation.
1. If you only use a part of the benefits awarded by the law, you pay the tax on the percentage actually used. For example, a new law allows you to enlarge your house by 1000 sq. ft, and you decide to only enlarge it by 500 sq. ft. You will be charged only 50% of the tax.
2. We discussed appreciation tax in an earlier article. The municipal tax is deductable when it comes to appreciation tax. Simply put: you sold a house making a $100,000, and were charged $20,000 in municipal tax, those $20,000 will be deducted from the $100,000 gain. You will only pay appreciation tax on $80,000 (if you have no further expenses to deduct).
To wrap everything up, let me review. The Local municipality tax on appreciation caused by local legislation only applies to appreciation cause by new legislation that enhances your property. The enhancement could be more building rights, change of the use allowed, etc. The appreciation is appraised by a registered appriser, who determines the value of the new right in the property. You pay the tax only when you decide to enjoy the benefit, such as selling the property or building a bigger house.
© 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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