The Ministry of Finance continues its attempts to cool the housing market and increase the supply of apartments entering the market through tax legislation. This morning (Thursday) a “memorandum of law amending the Real Estate Taxation (Appreciation and Acquisition) Law” was published for public comment, including the shortening of the “interim” period in which apartment improvers can sell the residential apartment exempt from appreciation tax, after purchasing another apartment under it; Raising the purchase tax brackets by purchasing a single apartment in an amount exceeding NIS 2 million; Cancellation of the benefit tax for land buyers who have not built on it for many years, “correction” of taxation in “shell apartments”, cancellation of exemption for those who are not residents of Israel from praise tax on the sale of a residential apartment and tax on renting a residential apartment, and more.
According to the Ministry of Finance, these amendments are expected to increase state revenues from taxes, as well as – according to the explanatory memorandum: “Encourage the sale of residential apartments in the near term, and reduce the tax incentive to purchase and maintain residential apartments.
On the revenue side, the Treasury expects that starting this year, due to the proposed amendments regarding the shortening of the period for replacing residential apartments, taxation of shell apartments and adding income from residential apartments in the additional tax base, the state’s revenue is expected to increase by NIS 100 million per year. On the other hand, due to the proposed amendment to change the purchase tax brackets, a reduction in state revenues of NIS 70 million per year is expected. In addition, starting in 2024, an increase of NIS 100 million in state revenues is expected due to the abolition of exemptions and tax benefits for foreign residents.
At the same time, an additional temporary provision in the memorandum, regarding better tax rates on real appreciation until the start date, is expected to reduce state tax revenues by NIS 30 million in 2022 and 2023, and reduce state tax revenues by NIS 90 million in 2024.
As stated, the first issue that is proposed to be amended concerns a period in which housing developers can own two residential apartments, and still be considered the owners of a single apartment, for the purpose of the tax benefits provided in the Real Estate Tax Law for single apartment owners. Today this period stands at 24 months. “The long period that currently exists in the law, benefits high-income households and harms young couples interested in purchasing an apartment in light of the negative impact on apartment prices,” the memorandum said. It is therefore proposed to shorten the period to 12 months.
Purchase tax on a single apartment: The “rich” will pay
The second amendment proposed in the memorandum is the amendment of the purchase tax brackets in the purchase of a single apartment. It is proposed to profit from the low tax brackets so that the tax burden on those who purchase apartments of medium value will be reduced. At the same time, it is proposed to increase the tax burden on the purchase of a single apartment in large amounts, in order to find a budgetary source for the profit of the lower tax brackets as stated. This is a proper balance that makes it possible to facilitate buyers of single apartments in medium amounts, by burdening the tax burden on buyers of apartments in very high amounts.
In fact, it is a matter of lowering the purchase tax for apartments in amounts lower than NIS 3.5 million and raising the purchase tax by tens of thousands of shekels for apartments in higher amounts. Last month, Globes correspondent Arik Mirowski revealed the fact that the Ministry of Finance disguised the purchase tax increase in a bill designed to make it easier for young couples. In the legislative stages no one mentioned the tax increase, nor was there an in-depth discussion about it. Everyone talked about the discount the young couples would receive, and “forgot” to talk about the fact that Gush Dan residents may pay dearly for it.
According to the memorandum, when purchasing an apartment, no tax will be paid on the part of the value up to NIS 1,930,000. For the part of the value that exceeds NIS 1,930,000 and up to NIS 2,330,000 – 3.5%. For the part of the value that exceeds NIS 2,330,000 and up to NIS 3,100,000 – 5%. For the part of the value that exceeds 3,100,000 and up to NIS 5,300,000 – 8%. And for the part of the value that exceeds NIS 5,300,000 – 10% tax will be paid.
You did not build – you will pay tax
The third amendment proposed in the memorandum is the cancellation of the benefit for the linear calculation of the beneficiary in the sale of a residential apartment built on a right in real estate that was vacant land at the time of its purchase. The amendment means that anyone who purchased land for construction but did not build over a period of time – will be required to pay praise tax according to the period of holding the building rights.
As of 2014, the sale of a residential apartment that is not the seller’s only apartment is subject to praise tax. However, with the abolition of the goodwill tax exemption in 2014, it was determined that the goodwill tax on the sale of an apartment purchased before the amendment will be calculated according to the “linear benefit calculation”, so that goodwill attributed to the period up to the amendment (January 1, 2014) will be exempt from goodwill tax. , While goodwill attributed to the period from the said date onwards will be subject to goodwill tax at the rate prescribed by the Real Estate Tax Law.
At the same time, the amendment did not limit the better linear calculation so that it would apply only to a right in real estate that was a residential apartment at the time the law came into force. Therefore, even a person who at the time of the amendment owned a right in real estate that is land (who could not be exempted from selling it before the amendment) can benefit from the sale of the right from the linear benefit calculation, provided he builds a residential apartment on the land before the sale. It is now proposed to amend the Real Estate Taxation Law so that sales of the aforesaid type will be subject to praise tax in accordance with the period of holding a right in the real estate. At the same time, it is proposed to allow a transition period of 4 years in order to accelerate construction on private land in these years.
Tax on praise income from the sale of residential apartments
Another issue that is proposed to be amended is in the matter of additional tax on real estate appreciation income (according to section 121B of the Income Tax Ordinance). Today, an additional tax is imposed on an individual whose taxable income exceeds about NIS 650,000 per year. The additional tax rate is 3% on the individual’s income above the said amount. Praise income from the sale of residential apartments up to a ceiling of NIS 4.75 million is not included in the tax base on which the additional tax is imposed, even though it is taxable income like any other income. The memorandum of law proposes to include the income from the appreciation of residential apartments in the tax base on which the additional tax is imposed, provided that the income is not exempt from appreciation tax under the Real Estate Tax Law.
Taxation of 83,000 apartments owned by non-residents
It is also proposed to stipulate that the additional tax will be collected as part of the tax assessment in the sale of the right in the land. This is to facilitate collection and prevent cases where the seller does not file an annual income tax return and does not pay the additional tax that he owes.
It is also proposed in the memorandum to cancel certain exemptions and discounts for those who are not residents of Israel who sell residential apartments in Israel. According to data from the Tax Authority, approximately 83,000 residential apartments are owned by non-residents. The figure does not include residential apartments purchased by immigrant Israelis. Approximately 40,000 apartments are located in Tel Aviv and Jerusalem.
Today, foreign residents can enjoy the social exemption granted in the sale of a single residential apartment by the seller, as well as the better linear calculation in the sale of a residential apartment in Israel, and an exemption on renting residential apartments, similar to Israeli residents.
“With regard to the current situation in other countries, these are exceptional exemptions that have no justification, especially today, given the limited supply of residential apartments to Israeli residents and high price levels,” the explanatory memorandum to the law memorandum read.
Against this background, it is proposed to cancel these benefits so that the income of foreign residents from their ownership of residential apartments in Israel will be taxed by the State of Israel, without providing the concessions given to Israeli residents. It is proposed that such a change in the tax regime will only begin from the beginning of 2024 in order to allow foreign residents a period of two years in which they can sell their apartments while receiving the existing tax benefit, if they so wish.
“Shlomo Nehama” correction
Another issue that is proposed to be regulated in the memorandum is “correction of distortion” – in the words of the explanatory memorandum in the memorandum – in the taxation of shell apartments. The memorandum explains that “currently there are cases where apartments, usually luxury apartments, are sold by the contractor without the interior being renovated in the apartment (‘shell apartment’). In terms of the wording of the existing law, there is controversy over And if the buyer of the apartment owes the higher purchase tax rates imposed on the purchase of a residential apartment for investment. “
According to the Ministry of Finance and the Tax Authority, “Substantially, there is no justification for purchasers of shell apartments to enjoy the tax advantage, and evade payment of the purchase tax rate imposed on residential dwellings.
This correction can easily be called “Solomon Solution Correction”. This is because it comes at the exact time after a scorching loss by the tax authority to businessman Shlomo Nehama in a dispute over the amount of tax he will pay for the sale of a luxury apartment in Rothschild Tower 1 in Tel Aviv.
At the heart of the dispute between Nehama and the tax authority were temporary and temporary renovations to the property that Nehama and his partner sold. The issue revolved around the question of selling a “shell apartment” that was completed to a residential apartment going up for sale, when the seller (Nehama) knew that the buyer of the apartment was not interested in this completion and it is not part of the sale in the relationship between the parties. In the circumstances, the question arose as to whether the seller was entitled to receive the exemption from praise tax due to the person who sold a “qualifying residential apartment” whose construction was completed. In July 2020, the Appeals Committee determined under the Real Estate Tax Law that Nehama would not pay the Authority a praise tax that it demanded, in the amount of NIS 4 million. Now comes a law memorandum that will “correct the distortion.”
Finally, “and to encourage the sale of land purchased before November 7, 2001, for the purpose of constructing residential apartments”, it is proposed to stipulate, as a temporary provision, that in the sale of a right in residential land, by an individual, for a period of three years, a reduced rate of appreciation tax shall apply. The real thing, provided that during the 8 years following the purchase the residential apartments that can be built according to the plan applied to them were built on the land.
These are lands that have been in the hands of their owners for many years and have received high praise. The proposed reduction is intended to serve as an incentive for the sale of the land and thus lead to an increase in the supply of residential apartments.
Supply flow race
“We waited a long time for these tax amendments, because rumors about it have been circulating in the market in recent months, and now it has arrived,” says real estate tax expert Dorit Gabay, former deputy and acting director of real estate taxation in Haifa.
She said, “As part of the state’s intervention in the market, and through taxation, they are trying to accelerate the flow of land for residential construction. “They own it in the near future. This is a race to flow the supply of land for construction, and to encourage foreign residents to sell at a low tax now instead of a high tax in the future.”
However, Gabay says, “Unfortunately, these laws are very beneficial to property owners but there has never been an in-depth examination of whether accelerated sales have yielded the target they aimed for. As someone who opposes tax intervention, my position does not change even today (92%), thaw for construction faster and at low ancillary costs (improvement levy, payments to RMI, and so on) “.
Part of the fix is problematic
According to real estate taxation expert Adv. Meir Mizrahi, “The proposed amendments to the law include a burden on the taxation of residential apartments, and at least part of the amendment is problematic. Thus, for example, a foreign resident who purchased an apartment in Israel is discriminated against. He is not entitled to an exemption from praise tax, but has so far enjoyed a linear tax rate. An amendment to the law seeks to prevent him from this relief. “Apart from the adverse change that harms non-resident buyers who knew in advance that they would benefit from the benefit denied to them, there are problems with regard to discrimination against the foreign resident prohibited by the tax treaty, so there is a chance that this amendment will be rejected.”
In addition, says Adv. Mizrahi, there is another violation of the taxation of residential apartments in everything related to landowners held by them for many years. “If in the past landowners could build apartments on the land and sell them tax-free, at least once every four years. Today, they are also asked to be denied the linear tax benefit (the salami method). The proposed amendment has special damage to landowners who cannot build on the land due to restrictions imposed on them by the state or due to the length of the particularly long planning procedures in Israel. It is proposed at least to alleviate these cases. “
Mizrahi, on the other hand, welcomes the relief planned by the Tax Authority for landowners to be built on it within a period of eight years. “A proper tax policy is to provide relief and delay construction and not just impose new cuts and taxes. Frequent amendments to real estate taxation are not beneficial to the real estate market, they create uncertainty and it is advisable to reduce and instill an atmosphere of certainty and stability in the market,” says Mizrahi.