Tax Reform and its Real Estate Implications
The Knesset recently approved Israel’s 2013-2014 budget, which was guided by the newly passed “Changing National Priorities” law. I enlisted Avigail Slonim-Rothner, an exceptional real estate attorney, to educate us on the new law, as it has many tax implications for overseas buyers of real estate in Israel. The following is a synopsis of Avigail’s essay.
The aim of the bill is to equalize the taxation of real estate to the tax rates applicable to other investments, such as stocks and bonds. The government’s goal is to (1) increase its tax revenue from real estate transactions, and (2) lower real estate prices by imposing heavier taxes on luxury homes.
For Israeli residents, the purchase tax on residential homes is calculated on a sliding scale. Purchasers of a first home are taxed at a significantly lower rate than owners of multiple homes. For a first home, the tax rate starts at 0% and graduates up to 5% for a unit costing up to 4,500,000 NIS. However, the tax rate for a second home starts at 5% and graduates up to 7% up to 4,500,000 NIS. Above 4,500,000 NIS, the tax rate increases significantly for both first and second home buyers – basically, the government is charging a luxury home tax.
Here’s the unpleasant news: The new law charges non-residents the tax rate paid by Israelis who own multiple homes, even if the apartment is the only home that the overseas buyers own in Israel. For example, if Mr. and Mrs. Cohen from Teaneck, New Jersey, want to buy an apartment priced at 1,470,000 NIS (around $400,000), they would be taxed over 5% while an Israeli first-home buyer would pay no purchase tax.
Note that home buyers making aliyah within two years of acquiring a home in Israel are considered Israeli residents and can receive a refund for the higher tax rate that they paid upon purchase.
Capital Gains Tax
Capital gains taxes are paid on profit made from the sale of real estate. The calculation of this tax is complex, as the rates vary depending on the length of time that the seller owned the property.
The current law allows for many exemptions from payment of capital gains taxes, and most residential homes are sold without being subject to the tax. The most commonly applied exemption allows an individual to sell a home once every four years tax-free, regardless of how many homes he owns.
The new law, which will come into effect as of January 1, 2014, offers fewer exemptions. The main exemption will be given to a person selling his only home in Israel.
Here, again, the law differentiates between Israeli residents and non-residents. Non-residents are considered to be owners of multiple homes even if the residential unit that they sold was their only property in Israel. Accordingly, they have to pay a higher capital gains rate unless they provide proof that they do not own a residence in their home country.
To read Avigail Slonim-Rothner’s original article which provides a more detailed review of the issues, feel free to contact her at firstname.lastname@example.org or 02-999-2435.
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. To sign up for his monthly market updates, contact him at email@example.com. Please visit his blog at www.myisraelhome.com.