Betterment tax (known also as “Capital Gains Tax” or “improvement tax”) is a tax levied on a real estate property seller, in accordance with the Land Taxation Law (betterment and purchase), 5723 – 1963.
The tax is designated to apply to the profits enjoyed by the seller of the property in Israel upon its sale.
The tax calculation is quite complex but in this article I shall review the principles according to which the calculation is performed.
How the betterment is calculated (the profit the tax is imposed on)?
In principle, the betterment (the profit the tax is imposed on) is the difference between the selling price of the property (in the current transaction) and the purchase price of the property (in the historic purchase transaction). The purchase price of the property is linked to the Consumer Price Index.
Deduction of expenses
Various expenses involved in the purchase of property and/or its sale and/or its development over the years (such as attorney’s fees, appraiser fees, tenant removal fees, renovation expenses, property taxes, improvement levy, etc.) may be deducted from the betterment.
Depreciation
In certain circumstances, depreciation is calculated in relation to the purchase price (depreciation of the value of the building as opposed to the value of the land), depending on the number of years that have passed between the purchase and the sale, which leads to a reduction in the purchase value and an increase in the betterment for which tax should be paid.
Tax rates
The tax rates that are the percentage from the betterment, depend on many factors including the date of purchase of the property, the date of sale of the property, the manner in which the property came to be in the seller’s possession (whether the seller purchased it, received it as a gift or via inheritance) and so on.
Inherited property
In principle, if the property was inherited by the seller, then in respect of betterment tax the purchase date of the property is the date on which it was purchased by the testator and the purchase price of the property will be its purchase price paid by the testator.
However, if the property was inherited from the testator who died during years when estate tax applied, the purchase price will be calculated according to the amount paid as estate tax and the purchase date shall be the date of death of the testator.
Property Received as a gift
In principle, if the property was inherited by the seller, then in respect of betterment tax the purchase date of the property is the date on which it was purchased by the testator and the purchase price of the property will be its purchase price paid by the testator.
There are exceptions to this rule in the event the gift giver died during years when estate tax applied, and the gift was not completed with registration prior to his death.
Tax exemption for the sale of a residential apartment
The seller of a residential apartment has several exemptions, when in the event he meets the criteria set out for their receipt, he will be exempt from tax on the sale of the apartment.
To check eligibility for a betterment tax exemption.
Betterment Tax Calculator
The Tax Authority’s website has a calculator for calculating betterment tax that can be used to get an estimate of the betterment tax in the transaction.
In any event, before the execution of any transaction it is advised to check carefully the tax aspects through an attorney specializing in the field as legislation is frequently amended, and mistakes regarding taxation may result in tax payments of tens and even hundreds of thousands of shekels.
Comment:
This paper is for general and preliminary information only and is not intended in any event be construed as legal counsel and/or as a substitute for legal counsel for any case and its circumstances.
The above must not be relied upon without consulting with a lawyer specializing in the field before taking any action or making any decision. The above is true only as of the date it was written, and its veracity may change from time to time.
Adv. Tali Kessler is a partner in the “Rechnitz, Kessler & Co. Law Office” operating in the field of commercial law, contracting and real estate. www.rk-law.co.il
This document and/or part thereof may not be used, distributed and/or reproduced and/or photocopied without permission.
This document may not be construed as consultation and/or any professional opinion.
