Appreciation tax is a tax on the capital gain realized by an individual when selling real estate. As a rule of thumb, the capital gain to be taxed is determined by calculating the difference between the shekel value of the initial purchase of the property and the shekel value of the sale after accounting for the effects of inflation in the interim period. If no capital gain exists, no tax is payable.
The vast majority of sales of residential properties by individuals in Israel are fully exempt from this tax. The main conditions for exemption are as follows:
- The individual/s selling the property have not sold another residential property in Israel in the four years preceding the current sale; or
- The individual/s selling the property have not sold another residential property in Israel in the 1½ years preceding the current sale, provided that in the period of 4 years preceding the current sale, the individual/s did not own more than one residential property in Israel at the same time; or
- The property is being transferred for no consideration (gift) between certain family members after the applicable “cooling-off” period has expired; or
- The property was initially received by the individual by way of inheritance from a close relative, provided that the deceased person only owned one apartment at the time of passing and would have been entitled to sell the property with a full exemption from tax (in accordance with any of the prior three conditions).
It must be emphasized here that the exemptions 1, 2 and 4 only apply to “residential” properties sold by individuals (as opposed to corporations).
In a situation where an individual is selling a property that was purchased from a builder and the property has yet to be completed and delivered or if a vacant lot is being sold, the property would not yet be considered a “residential” property and, therefore the sale would be subject to tax.
The current rates of appreciation tax applicable to a sale of real estate by an individual, which is not exempt for one of the reasons mentioned above, depend on when the property was purchased. The base rate for individuals until November 7th 2001 was 50%. After November 7th 2001, the rate was reduced to 20% but only in relation to that part of the capital gain that accrued following that date. For example, the sale of a non-exempt property that was purchased in February 2009 would be taxed at 20% of the capital gain. However, had that same property been purchased by the individual in 1982, the capital gain accrued before November 7th 2001, would be taxed at 50% and the remaining capital gain would be taxed at 20%. Corporations are assessed appreciation tax in accordance with the corporate income tax rate.
In addition, certain deductions (e.g. certain expenses for improving the property, estate agents’ fees and legal fees) are allowed to reduce the capital gain that is to be taxed upon presentation of tax invoices (“cheshbonit mas”) for the payments.
Certain other discounts may be available and it is therefore strongly recommended that one consult an attorney before entering into any real estate transaction.
Disclaimer: The above discussion is not intended to serve as legal advice for the purpose of entering into a specific transaction but rather as a general guide to many of the taxation issues that arise when contemplating a transaction of this nature. It is strongly recommended that the reader consult an attorney before entering into any real estate transaction.
About the Author
Aryeh Rachlin is a Jerusalem attorney with 20 years of experience representing clients in real estate transactions in Israel. You can contact Aryeh at +972-2-563-0224 +972-2-563-0224.
E-mail at: email@example.com
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