Introduction
Selling a second-hand apartment is a dramatic financial step. For most of us, it’s a once-in-a-lifetime thing, and it’s the biggest deal we’ll ever make. The State of Israel, in general, and the real estate market, is full of bureaucracy, taxes, and processes that are not at all friendly. The pitfalls can be hidden everywhere. Even if you use a broker/lawyer, whom you trust, you must understand what is involved, where you are going, and what awaits. My goal in this comprehensive guide is to draw the map that will lead you step by step, so that you know exactly where you are going, how to avoid mistakes and pitfalls, and how to sell the apartment optimally.
Preliminary inspections before deciding to sell a second-hand apartment
Before setting off, some tests are essential, even before making a final decision and putting the residential property up for sale.
These are the crucial tests:
What is the worth of the apartment?
What to do with the mortgage?
Is the apartment registered in your name in the Land Registry?
Is a mortgage or other restrictions recorded on your rights?
What are the expected taxes and expenses?
What is the estimated capital gains tax?
What is the estimated betterment levy?
Is there construction without a permit in the apartment, and what is its significance?
What if the apartment is rented but without a rental agreement?
What happens if you inherited the apartment but have not yet registered as an owner?
Here are some details about each of them.
What is the worth of the apartment?
This is the most crucial question the seller should ask himself before he advertises the apartment for sale. So how do you know the worth of the apartment?
First, you can try and find out in the building or even in the neighborhood how many apartments with similar characteristics were sold. Usually, apartments’ prices are calculated by their size. Each neighborhood has an acceptable price range per square meter, and the average price per square meter should be multiplied by the apartment size.
If you get information on apartments sold in the area that are different in size from the apartment offered for sale, you should adjust the price accordingly.
Of course, if the apartment is high standard renovated or has other unique elements, we can consider this in the property’s price.
In addition, the Tax Authority publishes a database of all transactions reported to it by dates, size of the apartment, floor, and location. Some websites use this database and also display transaction prices. You can check the Tax Authority database to see if transactions were reported in the building or the neighborhood.
Suppose all these tests have not yielded a satisfactory answer regarding the apartment’s sale price, it is possible to enlist the help of an appraiser who will assess the value of the apartment based on similar transactions.
It is advisable to offer the apartment for sale only after you decide to sell it. It is not advisable to advertise the apartment for sale to “test the water” or to see what offers you are getting. If the apartment has been advertised for a long time, potential buyers might think there is a defect in the apartment. The Israeli realtors name this: “burn” the apartment on the market.
Is the apartment registered in your name in the Land Registry?
Surprisingly (or not), it often happens that after purchasing the apartment and receiving possession of it, the buyers do not continue to monitor the work of the lawyer who represented them in the transaction and are not aware that the apartment was not registered in their name at all.
When they want to sell the apartment, they discover that it is not registered in their name but in the names of the sellers who sold it to them many years ago.
This also happens in gift transactions – you received the apartment 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 your name. Therefore, the first and most basic check is to issue a Land Registry extract and ensure that the apartment is registered in your name at the Land Registry. A Land Registry extract can be issued through the Ministry of Justice website after paying a fee.
If it is an apartment you purchased from a contractor, it is possible that the rights have not yet been registered in your name because handling the matter by the contractor’s lawyer has not yet been completed.
In this case, you need to contact the contractor’s lawyer and ask for a “certificate of rights”. This is a document produced by the lawyer on behalf of the contractor or the company that built the building. This document confirms that you are the owner of the apartment. At the same time, you should ask him for the “transfer of rights procedure” and also understand whether special costs are required in the sale of the apartment (which are anchored in the purchasing agreement of the apartment that you made in the past).
If the apartment is registered with the Israel Land Authority, a “certificate of rights” must be ordered from the Authority through the Authority’s website.
Is a mortgage or other restrictions recorded on your rights?
If you have taken out a mortgage and have not yet finished paying it, the mortgage is registered in relation to your rights in the Land Registry extract.
However, sometimes, even if you finished paying off the mortgage many years ago, the bank did not remove the mortgage registration from the Land Registry, and the mortgage is still listed as a limitation on your rights.
In such a case, you should ask the bank to cancel the mortgage registration.
You may find other foreclosures (for example, to state authorities or a creditor), and various comments (such as a note about a dangerous structure due to the municipality’s requirement to repair building defects, construction without a building permit, and more).
Of course, before offering the apartment for sale, one should check whether any registration in the Land Registry extract prevents the sale of the apartment and its transfer to another, whether it is necessary to take care of it and in what way.
It is advisable to perform these two tests (issuing a Land Registry extract or obtaining a “certificate of rights” from the person with whom the rights are registered and checking liens and restrictive comments) as soon as the decision to sell the apartment is made. Sometimes it turns out that there is an error or lack of registration whose amendment involves the performance of various legal actions and takes time.
What to do with the mortgage?
If you took out a loan to purchase the apartment (or for any other purpose) against which you mortgaged the property, you would have to repay the loan or transfer it to another property as part of the sale transaction.
It is worth checking in advance: What is the mortgage balance for repayment? Is it worth canceling the mortgage? Or maybe “freeze” it so it can be used soon to buy another property? Does the early repayment of the loan involve a fine or the payment of an early repayment fee? Can advance notice reduce the amount of the fine or commission?
These inquiries will help you gather important information that will help you prepare properly and wisely before you find buyers.
Expected taxes and expenses
For obvious reasons, before deciding to sell an apartment, you need to know how much taxes and expenses you are likely to pay and how much money you will “have left in your hand” after the transaction.
Usually, through preliminary tests, it is possible to get a reasonable estimate of the expected taxes and expenses.
Common expenses are:
Realtor payment who finds buyers for the apartment (usually in the range of 1% -2% of the price of the apartment plus VAT).
Lawyer payment who represented you in the transaction (usually in the range of 0.5% -1.5% of the price of the apartment plus VAT).
Appraiser payment – He will perform various tests for you if required (usually in the range between 1,500-3,500 NIS plus VAT)
Expected taxes:
Capital Gains tax paid to the tax authorities (see details below).
Betterment levy paid to the municipality / local committee (see details below).
Payments to the Israel Land Authority in respect of past debts.
Capital Gains Tax
Capital gains tax is a government tax applied to the difference between the sale price of the apartment and its purchase price.
In the past, for many years, it was possible to sell apartment/s and get an exemption from the capital gains tax quite easily. In most transactions, the seller was not required to pay capital gains tax. However, this changed in 2014.
Today the common exemptions from capital gains tax are:
• In relation to the seller of an apartment that is his only apartment (and he also has no share in another apartment), he did not receive it (or the money to purchase it as a gift), he has owned it for more than 18 months from the date construction was completed, and he did not sell another tax-exempt apartment in 18 months The latter.
or
• In relation to the seller of an apartment who inherited it from a parent or grandparent or spouse, the testator did not have more than one apartment at the time of his death, and if the testator had now sold the apartment, he was entitled to exemption from capital gains tax.
There are other exemptions (which are not used as often), so it is worth checking out.
The capital gains tax rate today is 25% (from the increase in the value of the apartment). But if the apartment was purchased before 2014, it might be possible to calculate the tax on a linear basis, which results in a lower tax rate.
In addition, if the apartment has unrealized building rights, which affect the price, then the value of these rights is subject to capital gains tax even if the seller is entitled to an exemption from capital gains tax on the sale of the apartment.
Examples of apartments with additional building rights that affect the price:
• A small house built on a plot on which it is possible (planning-wise) to build a much larger house or several housing units.
• Apartment located in a building with only four apartments. It is possible (planning-wise) to add six additional apartments to the building.
• An apartment located in a building in respect of which an agreement of TMA 38 was signed, according to which the building will be demolished and a new building with more spacious apartments will be built in its place.
In such a case, an (artificial) separation is made between the value of the apartment (or house) without the rights and the value of the rights. In relation to the value of the apartment, it is possible to request (and receive) an exemption from capital gains tax or a linear calculation in the appropriate cases. With regard to the value of the rights, no exemption or relief can be obtained and they are subject to capital gains tax (the rate of which may be as high as 45% – depending on the time of purchase of the apartment).
Suppose the seller has received the apartment as a gift or has received more than 50% of its purchase price as a gift. In that case, he can’t obtain an exemption from capital gains unless at least four years have passed from the date of purchase or three years since the seller began to live in it the apartment as its owner.
In the following cases, we recommend checking whether it is possible to obtain an exemption from capital gains tax or a linear calculation, and if not, whether there is a way to deal with it on time to avoid heavy taxation:
A vacation apartment (according to the building permit of the building or the actual use);
An apartment that was converted into an office;
Subdivided apartment (divided into several housing units legally or illegally);
A seller whose center of life is not in Israel and/or has been outside Israel for more than 183 days during the last year is considered a foreign resident. Foreign residents are not entitled to an exemption from capital gains tax when they sell their apartment in Israel (even if they have only one apartment in Israel). But, they can get an exemption if they bring a reference from the tax authority in their resident country proving that they don’t have an apartment there. If the tax authority in their country of residence does not provide such a reference, they can provide other proof.
