When selling a property in Israel, a key question is the amount of capital gains tax (Mas Shevach) the seller will be required to pay. Many are unaware that mortgage interest expenses paid over the years are deductible expenses for calculating capital gains tax and can significantly reduce the tax amount.
Recently, we handled an interesting case of a couple who wanted to sell their apartment. Since they were not eligible for a capital gains tax exemption, we needed to calculate the applicable tax on the transaction. During the case, it became clear that the sellers had taken out a substantial mortgage to purchase the property but had not kept organized records of interest payments over the years.
It’s important to emphasize that according to the law, interest expenses paid on loans taken for property acquisition are deductible expenses in calculating the capital gain. This means that the amount of interest paid can be deducted from the capital gain (the taxable profit on the property), thereby reducing the tax liability.
In this case, we urgently requested detailed documentation from the bank regarding the interest payments. Despite the limited time available, we obtained the required approval. The interest amounts paid were significant, and submitting them to the real estate tax authorities as part of the tax assessment reduced the sellers’ tax liability substantially.
In light of this, we recommend that all property owners:
1. Maintain organized records of all mortgage payments, including details of the interest component
2. Request annual statements from the bank regarding interest payments
3. Consult with an experienced real estate attorney before executing a sale transaction to ensure optimal utilization of all deductible expenses
It’s important to remember that even if you haven’t kept organized documentation, it’s usually possible to obtain retroactive approvals from the bank regarding interest payments (at least for the past seven years). However, the process of obtaining these approvals may take some time, so it’s recommended that you prepare for this in advance.
Proper tax planning and presentation of all deductible expenses are integral to maximizing tax savings opportunities when selling real estate subject to capital gains tax. Maintaining careful documentation and record-keeping of expenses over the years, combined with professional legal guidance, can lead to significant savings in tax payments.
