Prior to the creation of the state of Israel, Britain ruled over the land for thirty years and created strict zoning laws regulating Jerusalem construction. Over the past few decades, there has been a movement to rezone Jerusalem in order to encourage greater development of the city.
Back in 2001, the Jerusalem municipality chose as its maiden project to rezone Rechavia and part of adjoining Kiryat Shmuel. Three years later, the city published preliminary plans which, over the past decade, have been pored over and debated during a long and arduous public review period. Finally, in July 2015, the rezoning plan was approved and implemented into law.
Parenthetically, the city subsequently commenced rezoning plans for all Jerusalem neighborhoods, which we expect will be approved over the next few years.
The result of the new zoning plan is that all properties falling within the borders of Rechavia and part of Kiryat Shmuel have gained significant development rights (also known as “building rights”) which will allow the property owners to either expand their homes or add additional floors and apartments to the building.
However, this windfall comes at a price. When owners utilize these development rights, they must pay a betterment tax, known as “hetel hashbacha.” This betterment tax is triggered when an owner sells their apartment or requests a building permit. (There are certain exemptions from this tax, and the ability to take advantage of them depends on a number of criteria. For detailed information regarding exemptions, I recommend that you contact attorney Josh Portman - firstname.lastname@example.org - who gave input on the content of this article.)
Upon a sale or application for a building permit, the betterment tax on the new development rights for a lower floor unit is calculated at 50% of the development rights’ built value, minus the cost of construction. Assuming one square meter of newly constructed space in Rechavia is worth approximately $10,000 and the construction cost is approximately $1,500 per sqm, the tax would be $8,500 (value minus construction cost) divided by two, or approximately $4,250 per square meter of development rights.
However, units on upper floors typically pay a lower betterment tax rate, as the probability that the property owner will use the development rights is smaller. Simply put: if your apartment is on an upper floor, you will only be able to use the building rights if the apartments below you also expand – as opposed to the owner of a garden apartment who can more easily utilize the newly-gained development rights.
Case in point: We recently became involved in the sale of a Rechavia apartment situated on an upper floor of an older building. Upon the recent implementation of the new zoning laws, the unit gained 32 square meters of building rights. If the apartment was situated on the ground floor, the total betterment tax would have been over $135,000. However, due to this unit being three floors above the ground level, its betterment tax will be about $60,000.
The silver lining is that this betterment tax reduces capital gains tax obligations. For example, if one’s profit on the sale of an apartment is $500,000 but the betterment tax is $150,000, then the profit realized for capital gains tax calculations will be lowered to $350,000.
Are these new development rights good for property owners? Generally, the answer is yes, as owners gain additional development rights at a relatively low price. However, for my client who is selling his upper floor apartment, as discussed above, the newly added development rights will set him back $60,000 – and unfortunately a buyer will probably not pay a higher purchase price despite gaining these building rights, due to the difficulty in utilizing them.
As I received input from an attorney, I was requested to add the following legal disclaimer: The above is for informational purposes only and in no way should be construed to come in place of using legal counsel and hiring professionals to carry out all due diligence, including reviewing all legal and planning issues, prior to selling or purchasing an apartment.
Gedaliah Borvick is the founder of My Israel Home (www.myisraelhome.com), a real estate agency focused on helping people from abroad buy and sell homes in Israel. To sign up for his monthly market updates, contact him at email@example.com.