Raising the purchase tax in connection with real estate investors
On June 14th 2015 the Government in Israel approved significant taxation changes that are expected to affect real estate investors. According to the bill that was approved, with effect as of July 1st 2015, purchase tax will be raised in respect of any apartment buyer who already owns an apartment: up to the amount of 4.8 million ILS a purchase tax of 8% will be paid (instead of a few tax brackets ranging from 5% to 7% today) and above this amount a purchase tax of 10% shall be paid (instead of 8% or 10% paid today).
This represents an increase in the purchase tax rate of 30,000 ILS in respect of an apartment worth 1 million ILS and 100,000 ILS in respect of an apartment worth 5 million ILS.
The phrase “real estate investors” includes anyone purchasing a residential apartment, when he already has rights in a previous residential apartment. It is enough that the buyer is the owner of more than 1/3 of an apartment for these high tax rates to apply.
The government’s goal is to suppress apartment buyers from amongst real estate investors through heavier taxation.
The tax rate is determined according to the date on which the agreement was signed. Therefore, it is advisable to bring forward the execution of the agreement before the end of June 2015.
In the event there is difficulty in signing a detailed agreement, one could enjoy the reduced tax rate through the execution of a memorandum of understanding, if according to its phrasing it binds the parties and contains all of the material transaction information (such as price, date of delivery of possession, payment terms, etc.), or alternatively, through a conditional agreement, provided the memorandum of understanding or the agreement will be signed before the end of June 2015.
Changes regarding housing upgraders
Today, housing upgraders are eligible to purchase an apartment and undertake to sell their previous apartment within 24 months. In such a case they pay a purchase tax at the low rates available to those who only have one apartment. The difference is “frozen” and as soon as the previous apartment is sold, within the said period of time, the amount of the difference is canceled. In the event the previous apartment is not sold within the 24 months (from the date of purchase of the additional apartment), the buyers are required to pay the difference plus interest and linkage.
Today, the government intends to shorten the period during which the housing upgraders are required to sell their apartments to 12 months only.
The government’s goal is to provide incentives for housing upgraders to sell their previous apartments.
Changes concerning heirs
Today, anyone receiving an apartment in Israel as inheritance from their parents, grandparents (grandfather and/or grandmother) or their spouse, is entitled to sell it with an exemption from capital gains tax provided that the testator was the owner of one apartment only. Eligibility for this exemption is not limited in time and it also applies to anybody who owns a number of apartments.
The government in Israel intends to limit the length of time during which one can take advantage of this exemption to 24 months only after the death of the testator.
The aim is to incentivize heirs to sell the apartment they have inherited.
Registration of rights to an apartment in the name of a child – is it advisable?
Many real estate investors, who wish to enjoy the reduced purchase tax rate, purchase an apartment in the name of a child (adult) who does not own a previous apartment.
On the one hand, they do enjoy a reduced purchase tax rate.
On the other hand, the child will have to pay a purchase tax at a higher rate, when wishing to purchase an apartment for himself, and (according to the guidelines of the Bank of Israel) will be able to receive a mortgage at a rate of up to 50% of the value of the apartment (as opposed to those who do not own a previous apartment who can receive a mortgage at a rate of up to 70% of the value of the apartment).
In addition, an apartment registered in the name of a child exposes the parents to claims on the part of the spouse of the child concerning the rights in said apartment, claims of creditors of the child and disputes between the child and the parents that may make it difficult for the parents to “act as owners” of the apartment.
Furthermore, taxation regarding a future sale of said apartment would be subject to the “cooling off” periods prescribed by law – the child will be required to hold the apartment for at least four years before being entitled to sell it with an exemption from capital gains tax in the event the apartment does not serve as his residence, or at least three years in the event it does serve as his residence.
Note:
This article provides general and preliminary information only and should not be construed in any event as legal counseling and/or as a substitute for legal counseling in respect of any case and its circumstances.
The above should not be relied upon without consulting with a lawyer in the field before taking any action or making any decision. The above is true as of the date of its composition, and its veracity may change from time to time.
Advocate Tali Kessler is a partner in Rechnitz, Kessler & Co. Law Office & Notary engaged in the field of commercial law, real estate and land taxation.
Distribution and/or duplication and/or photocopying of this document and/or part thereof without permission are prohibited.
The contents of this document should not be construed as counseling and/or as a professional opinion of any kind.
