Introduction
Real estate transactions are dramatic financial steps. For most of us, they happen only a few times in our lives, and these are the largest and most significant transactions we will make.
The State of Israel, in general, and the real estate market are burdened with bureaucracy, taxes, and other unfriendly processes. The pitfalls may be hidden everywhere.
Even if you are using a lawyer you trust (and it is good that you do), you must understand what is involved, where you are going, and what awaits you.
My goal in this comprehensive guide is to draw a map that will lead you step by step so that you know exactly where you are going, how to avoid mistakes and pitfalls and make an informed decision about transferring the property only after you are aware of all the implications of the matter and what exactly the process awaits you.
Why do people transfer property for free?
The reasons for transferring property without consideration are many and varied.
Often, the reason is the transferor’s desire to carry out tax planning. Someone who owns more than one residential apartment (or one residential house) is not entitled to an exemption from capital gains tax on the sale of the residential apartment.
In addition, someone who owns a residential apartment (or a residential house) and purchases an additional residential apartment pays a significantly higher purchase tax than someone who buys their first apartment.
For this reason, there is a common tax planning, according to which, before executing the transaction (selling one of the residential apartments or purchasing an additional apartment), one (or more) residential apartments are transferred to children/parents – all in order to save on capital gains tax/purchase tax at the time of the transaction they wish to make.
Of course, the transfer of property as a gift must be genuine. Otherwise, the transferor and the recipient could be subject to tax authorities claiming this is an “artificial transaction”.
Another common reason for making a transfer without consideration is the transferor’s desire to distribute his property while he is still alive and before his death to prevent future disputes between his heirs or to assure the recipient that the property will be transferred to him in a more certain manner (compared to transferring it under a will, after the testator’s death).
Preliminary checks before gifting a property?
Before performing the transfer, several checks need to be performed:
How much is the apartment worth?
Why is this important? The purchase tax amount that will be paid is derived from the value of the apartment.
Although a transfer without consideration between relatives is only liable for one-third of the regular purchase tax that would have been paid in a transaction with full consideration, the reduced tax is also calculated based on the value of the apartment.
It is essential to know that the Tax Authority reviews all reported transactions. They check whether the reported value makes sense and is consistent with the prices of transactions made in the area. If the value reported to the Tax Authority is too low, they may not accept it and issue an assessment based on their best judgment.
Is the apartment registered in your name in the land registry?
Often, apartment buyers do not verify that the apartment they purchased was registered in their name in the land registry after they paid all the consideration for it and received possession of it. The lawyer who represented them in the transaction neglected to handle the matter, he did not register the apartment in their name, and the buyers were unaware of this.
When those buyers decide to make the transfer without consideration, they issue a title extract from the Land Registry (“Nesach Tabu”) and discover that the apartment is not registered in their name but in the names of the sellers who sold it to them years ago.
This may also happen in gift transactions. The apartment was received as a gift from a parent or other family member, and the lawyer who handled it did not complete the transaction and did not register the rights in the recipient’s name.
Therefore, the first and most basic check is to issue a title extract and verify that the apartment is registered in the transferor’s name at the Land Registry Office.
A title extract can be easily issued via the Ministry of Justice website after paying a fee.
If the apartment was purchased from a contractor, the rights may not have been registered in the transferor’s name since the contractor’s lawyer has not yet completed the registration.
In this case, you should contact the contractor or the contractor’s lawyer and request a “rights certificate”, confirming that the apartment belongs to the transferor.
At the same time, you should ask him for the “rights transfer procedure”, which details the procedure required to transfer rights in the apartment in the contractor’s books. It would be best if you also understood whether special costs are required to transfer the rights in the apartment (which are anchored in the apartment purchase agreement made in the past).
If the apartment is registered in the Israel Land Authority books, a “rights certificate” must be ordered from the authority. The certificate can be ordered via the authority’s website.
Is there a mortgage or other restrictive warning note on the rights to the apartment?
If the transferor took out a mortgage and has not yet finished paying it off, then the title extract probably contains a registered mortgage pertaining to his rights.
However, sometimes, even if the transferor finished paying off the mortgage many years ago, the bank has not canceled the mortgage’s registration from the title extract, and the mortgage is still registered on the transferor’s rights.
In such a case, you should contact the bank and ask it to handle the removal of the mortgage registration.
In addition to the mortgage, the transferor may find a lien (in favor of a governmental authority or any other creditor), various warning notes (such as a warning note about a dangerous structure due to the local authority’s requirement to repair defects in the building, warning notes on construction irregularities, notes on planning and construction files, and so on).
Of course, before carrying out the transfer, one must examine the nature of the warning note, whether it prevents the transfer of the apartment to the recipient, whether it is necessary to address the warning note, and in what manner.
What about the mortgage?
If you took out a loan to purchase the apartment (or for any other purpose) against which you mortgaged the apartment, you will need to repay the loan or receive the bank’s consent to carry out the gift transaction.
The bank is not required to agree, and the procedure will take time.
It is worth checking with the bank in advance to determine whether it will be possible to obtain its consent to the transfer. Without the bank’s consent, the registration of the transfer of rights in the recipient’s name will not be completed.
Expected taxes and expenses
According to the broad wording of the Real Estate Taxation Law, any granting of a right in real estate, its transfer or renunciation thereof, whether for consideration or without consideration, is a “sale” to which the law applies and constitutes a taxable event.
However, there are several specific cases in which, although it is a tax event, the legislator recognized the unique circumstances of those cases and granted full or partial exemption from capital gains tax and purchase tax to the parties to the transaction.
Expected Taxes – Capital Gains Tax
A transfer of real estate as a gift (without consideration) from an individual to a relative is exempt from capital gains tax. The exemption is possible for a gift transfer of any real estate property (not just a residential property).
Also, the transfer as a gift of residential property from an individual to his spouse who lives with him and runs a joint household with him for at least a year before the transaction date is exempt from capital gains tax.
In practice, the gift recipient steps into the transferor’s shoes for tax purposes. When the gift recipient sells the property he received as a gift, he will be liable to pay tax on the capital gains that accrued since the transferor purchased the property.
If the gift recipient and the transferor used the capital gains tax exemption pertaining to a gift transfer between relatives, then when the transferee sells the property he received as a gift, the date of purchase and the purchase value (to calculate the capital gains tax) will be the date of purchase and the purchase value of the property by the transferor.
The exemption from the tax on gifts between relatives is subject to several cumulative conditions:
The exemption will only be granted in a transaction without consideration, meaning that the gift recipient did not pay any consideration for it, whether in money or the equivalent of money.
In this context, it should be noted that giving two or more gifts at the same time, meaning that the giver who gives one asset receives another asset from the recipient of the gift, does not constitute a gift but a transaction for taxable consideration (since it is essentially an exchange transaction – the giver of the gift transfers one asset and receives another asset in its place). This does not mean that the recipient of the asset will never be able to give a gift to the person from whom he received the asset. However, the transaction in which the gift recipient gives another asset as a gift to the person from whom he received the first asset must be completely separate from the original transaction (the transaction in which the first asset was given as a gift). The time element, in this case, is significant. The longer the time between two gift transactions, the easier it will be to convince the tax authorities that these are not transactions that are exchanges but two real gifts that are unrelated.
The giver and recipient of the gift must be individuals (i.e., flesh and blood people), as opposed to a company, partnership, association, cooperative, or any other type of corporation, which is a creation of the law.
The recipient must be a “relative” of the giver.
Who will be considered a “relative” for this exemption? Relatives of the giver will be considered his spouse; his parents or the parents of his parents or his offspring or offspring of a spouse and the spouses of each of these;
Who will not be considered a “relative” for this exemption? Any relative who is not explicitly specified in the law’s definition as “relative”.
According to the interpretation arising from the Aliza Lebanon ruling, a partner will be considered a “relative” of the gift giver both concerning the general exemption for the transfer of real estate as a gift from an individual to his or her relative and in appropriate circumstances, concerning the transfer of residential property from an individual to his partner who lives with him or her and manages a mutual household with him or her for at least a year before the date of the transaction.
