The answers to the questions all clients ask about taxation of the third apartment (in Israel)
Tali Kessler, ADV. and Tal Rechnitz, ADV.
Commencing on January 1st, 2017, the Law of the Third Apartment Taxation came into force.
We have received a lot of questions from our clients about it. We will do our best to summarize for you the answers to the questions everyone asks:
To whom does it apply?
The Law applies to an individual who, jointly with his basic family unit (spouse and children up to the age of 18), owns 249% or higher of the property rights of residential apartments.
Assuming that your basic family unit owns 249% or higher, you will need to pay tax on the third apartment and on the fourth, the fifth, etc.
If this is the case, you need to report to the Tax Authorities by March 2017, regarding the apartments you own and regarding the apartment/s in respect of which you choose to pay the tax.
Really, is it already in effect?
Yes. It is already in effect. Anyone who owns (jointly with his basic family unit) 249% or higher of residential apartments, needs to submit a tax report on all the apartments he owns by March 31st, 2017, and decide regarding which two of the apartments he has no intention to pay the tax.
“Residential apartment” also includes an apartment which serves as an office or which is designated to residential use by its nature or pursuant to a zoning plan or which is actually used for residence.
The tax must be paid in two installments: the first one is due by June 30th, 2017, and the second one is due by the December 31st, 2017.
How is the tax calculated?
The tax is set at the rate of 1% of the property value, but not more than NIS 1,500 per month. The property value is determined by the Tax Authority.
On the website of the Tax Authority there is a friendly Calculator enabling the calculation of the property value (according to a very complex algorithm) and of the tax deriving from it.
It is important to know that the property value is determined by a very complex formula which combines vast statistical data, however in practice real value and the calculated value can be different.
What can be done to avoid / reduce the tax liability?
Sell one or more of the apartments or give it or them as a gift to the children (assuming that they don’t have more than one apartment themselves).
Before transferring the apartment/s to your children, one should give more thought –
- Will your child want to sell under exemption an apartment he owns in the future?
- Will your child want to purchase an apartment in the future and to pay a reduced purchase tax (on first apartment) and get a mortgage at the maximum amount?
- What is the marital status of the child and whether it effects the various considerations within the transfer?
You can find creative solutions but you should consult a good Israeli lawyer.
Can a prenuptial agreement between spouses regarding property separation discharge them from paying the tax?
In the specific case of taxation of the third apartment, a prenuptial agreement does not help.
The ownership of the apartments is considered in common despite any prenuptial agreement.
According to the current wording of the Law, it is not only that the calculation in relation to the apartments owned by each one of them is common, but they are also liable for each other’s tax charges (which means that if one of them does not pay the tax in respect of the third apartment, the Tax Authorities will be able to demand it from the other one).
If I am holding the apartment through a company – Do I need to pay tax for that apartment?
Yes. One must pay the tax if he holds an apartment through a company.
Very important to note before concluding!
As part of the tax reform which took effect on January 1st, 2017, there are extreme tax consequences in relation to one who is a shareholder in a company which owns an apartment, and he lives in the same apartment.
The legislator allows certain tax benefits for those who take care of it (meaning transferring the apartment to the shareholder’s private ownership) during the next few months.
If this is indeed the case, we recommend that you handle it as soon as possible.
There were a few petitions against the law which have been submitted to the Supreme Court regarding the improper legislation process. The Court has not made its decision yet though it is due by the end of March. We think that it is advisable to be ready with the right solution in case the petitions are rejected because the last day to submit the tax report is March 31st 2017.
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 an Israeli lawyer 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.
Distribution and/or duplication and/or photocopying of this document and/or part thereof without permission are prohibited.
