Real Estate Tax Reform – A Frank Conversation
A recent email dialogue with my partner Eliezer Goldberg:
Gedaliah: Any ideas for an interesting article?
Eliezer: How about: “The new reform in Israeli real estate taxes – how does it affect you?” I went to a great seminar about the newly enacted reforms which apply retroactively from January 2011 until December 31, 2012.
G: So far half my readers have already fallen asleep. :)
E: BTW, don’t forget to write that this is a general overview but your readers should consult with a lawyer for specific guidelines.
G: Disclaimer is out of the way. Please explain why the government would create a tax reform for only 24 months.
E: The idea is to incentivize people to sell now and to lower sales prices.
G: That’s a difficult proposition: to get more people to sell for less money.
E: Here’s the concept. There are two real estate taxes: a buyer’s purchase tax and a seller’s capital gains tax. Buyers of first homes pay significantly reduced acquisition taxes.
G: That a purchaser of a first home has a big tax advantage over the investor buying multiple homes is old news. What’s the critical benefit provided by this new legislation?
E: The new twist is on the other side of the ledger: Mas Shevach or capital gains tax. If you sell an apartment during this time period, you will pay less capital gains taxes.
G: The previous law allowed owners to sell one property every four years without having to pay capital gains taxes.
E: And now, until the end of 2012, you can sell up to 3 properties and only pay capital gains taxes on the portion of each sale over 2.2m NIS. Plus you can sell apartments currently being used as offices, which weren’t included in the previous “1 apartment in 4 years” exception. In addition, after 2012 the government will limit this exception to 1 apartment in 8 years.
G: So the goal is to quickly get more apartments on the market, thus causing prices to drop due to greater supply.
E: Right. Some sellers would take a lower price if they could eliminate a 20% capital gains tax.
G: So, this is all good if it works . . . but will it?
E: The tax reform only affects people who own multiple properties and also people who own apartments currently used as office space. But I think the government made a mistake offering the tax amnesty only if the apartment will stop being used commercially.
G: You think this usage limitation will decrease its value and therefore owners won’t be incentivized to sell?
E: Correct. Bottom line: this law offers amnesty for just a small group of people who own multiple apartments. So I don’t expect to see any appreciable change in sales volume or prices. Basically, the government is making a lot of noise to show that they’re trying to bring down pricing, but they’re not attacking the real problem.
G: Which is: Minhal (Israel Lands Authority) must expedite the process of rezoning farmland to residential usage to allow developers to quickly fill the backlog for up to 30,000 housing units, thereby causing lower housing prices based on the laws of supply and demand.
E: Exactly. So now you understand why I don’t believe that this tax reform will create any significant spike in sales activity or drop in pricing between now and the end of 2012.
G: If that’s the case, I think we better set up our tent in Rothschild Boulevard.
Gedaliah Borvick is the founder of My Israel Home, a real estate agency focused on helping people from abroad buy and sell homes in Israel. You may contact him at firstname.lastname@example.org.