Israel and Israela Israeli have been married for eight years and live in a shared apartment they bought together. Israel has another apartment that was purchased before the marriage. The two decided to divorce, and Israela purchased Israel’s share in the shared apartment, through her mortgage that she took. Israela’s lawyers explained to her without hesitation that according to Section 4A of the Real Estate Taxation Law, the transfer of rights in real estate during divorce proceedings is not considered a sale, whether the transfer is between spouses or whether it is a transfer from the spouses to their children. The transfer of the rights to Israel is not considered a tax event, or a sale subject to appreciation tax and purchase tax according to law, therefore there is no need at all to report to the tax authorities. Sounds easy and simple? not exactly.
“Following a change in legislation from 2014, concerning the taxation of residential apartments, it is not always worthwhile to take advantage of the provisions of this law, and sometimes taking advantage of the provision may put the woman in a tax trap and pay more tax in the future,”Hir attorney and CPA Shai Einat, expert in real estate taxation.
According to him, “When the wife comes to sell the apartment, she will not be able to receive as a deduction the consideration she paid to her ex-spouse for the purchase of his share in the apartment, since this consideration was not reported to the director of real estate taxation.”
Attorney Einat suggests not to always take advantage of the “divorce clause”, but to report to the real estate tax director about the sale of the man’s share in the apartment to the woman in the usual and accepted way of selling an apartment. As the cost of the consideration she paid the man for his share in the apartment. This will save her a lot of tax in the future when she comes to sell the apartment.”
The example of Israel and Israel is hypothetical, but it is also realistic and everyday for many spouses in divorce proceedings. Divorce disputes generate a host of disputes and problems – personal, financial, operational, legal – all of which are wrapped in a thick layer of emotions that makes it difficult to resolve them. Questions of real estate taxation often enter into this cauldron, but many spouses are completely unaware that they may fall into taxation traps.
According to attorney Einat, “there is great importance in the correct drafting of divorce agreement clauses in the taxation aspect, not necessarily in order to create a tax advantage, but mainly in order not to cause any party to have a pocket deficit and pay unnecessary taxes in the future.”
Attorney Maya Wiseman, who specializes in family and inheritance law, explains that one of the common pitfalls in divorces is the appreciation tax trap. According to her, “Future payment of appreciation tax is the most common taxation trap in divorce disputes, because in most judgments the issue does not come up at all. Usually one of the spouses gets the residential apartment – statistically it is a woman who lives in the apartment with the children – and the other gets all the savings and liquid funds. When the spouse who received the residential apartment, asks to sell it to a third party, he will be forced to bear all the sales tax payments alone – a payment that can reach hundreds of thousands of shekels.”
According to Attorney Wiseman, the solution is found in court rulings regarding the holding of shares in a company: “In an important ruling by Judge Tamar Senonit Forer of the Tel Aviv Family Court, which reached the Supreme Court and was approved, it was determined that the wife will provide security for the payment of a possible future tax in the event that the husband’s shares in the company are sold to the C. That is, the wife will not be subject to a hypothetical tax, which may and will never be paid, but on the other hand, if and when a transaction of sale of shares occurs in the future and the tax will apply – this will be paid, in its relative part.
All this no longer sounds so simple. How do you know in advance if a tax charge is expected during a divorce and how do you avoid these pitfalls? Real estate and family taxation experts have put together some taxation decisions that can solve in advance some of the dilemmas that surround the matters of dividing real estate between spouses.
1. Is the compensation for public knowledge taxable?
AA 420/20 Shmuel Yehezkel N. Director of Real Estate Taxation Haifa
■ facts: The late Shmuel Yehezkel Naji and Tzipora David were known to the public. They separated and a dispute broke out between them regarding the division of the property. During the dispute, the court ruled that Yehezkel must give Tzipora half of the value of his shares in a management company that he fully owned. The value of half of the deceased’s rights in the company was set at about 4 million shekels as of the day the couple separated in December 1995, and in 2006 about 11.9 million shekels were paid to Tsifora, including the linkage differences and accrued interest.
The payment was made by the holding company, while selling shares that were held by Shmuel’s son. As a result, a conflict arose between Shmuel Yehezkel and the Haifa Real Estate Taxation Director regarding the nature of the transaction that was made to pay the value of the shares to Zipora.
■ The dispute: Yehezkel claimed that this was a transaction for the purchase of Tzipora’s shares in the company, while according to the Tax Authority it was a payment of a financial debt owed by the deceased and his heirs to Tzipora through a transaction for the sale of shares in a real estate association – all of the company’s assets were an office building known as the “Kohav Yakneam” building. Under these circumstances, the tax authority required Yehezkel to pay the appreciation tax and the purchase tax
■ Court decision: The Supreme Court ruled in the dispute between the couple that Tzipora was not granted rights in shares in the company, but all her rights amounted to the financial charge owed by the deceased according to the value of half of the company on the day of separation, therefore in the dispute between the Tax Authority and Ezekiel it was determined that this was not a transaction for the sale of Tzipora’s shares to the deceased but a transaction for disposal The debt to the bird.
The judge added and noted that since Tzipora had no rights in the company’s shares or its assets, there is no relevance to the provisions of Section 4A of the Real Estate Taxation Law, since the “property” – the shares in the company – never passed from Tzipora to the deceased, since according to the ruling of the Supreme Court Tzipora had no rights in “asset” but only rights to receive its value.
■ the meaning: “The court’s determination regarding the manner of dividing the property created a tax disadvantage for Ezekiel, since in this situation he could not benefit in the future from the consideration he paid to Tsiforah,” explains attorney Einat. According to him, “at the time of separation, the proper wording should have been different – the parties should have reached To understand that Tzipora is entitled to half of the shares in the management company by virtue of being known to the public, and that Yehezkel is purchasing them from her in exchange. In this way, Yehezkel could in the future, when selling the shares to a third party, receive the consideration he paid to Zipora as the purchase cost of the shares and in this way pay less tax for the consideration.”
2. Exemption for an apartment sold immediately after the divorce agreement
Taxation Decision 1609/21
■ the facts: One of the most common cases came to the tax authority’s decision – spouses lived in a shared apartment, and as part of the divorce agreement it was determined that the couple’s apartment would be transferred to the wife’s full ownership within the provisions of Section 4A of the Real Estate Taxation Law. Immediately after that, the woman asked to sell the residential apartment exempt from appreciation tax as a single apartment in accordance with the provisions of Section 49B(2) of the Real Estate Taxation Law.
■ The legal question: Is the wife entitled to exemption from sales tax despite the fact that the provisions of section 49b(2) of the law require that the seller has full ownership of the apartment for a period of at least 18 months before the sale? In this case, 18 months have not yet passed from the date the man received the rights in the apartment until the sale of the apartment.
■ The tax decision: “Within the framework of Taxation Decision No. 1609/21, it was determined that the exemption requirements are met in the circumstances that the apartment was owned by the couple for a period of 18 months prior to the divorce, since a man and a woman are considered as one family unit,” explains attorney Shai Einat. “In other words, the Tax Authority accepted the position according to which a woman should not be a separate owner of the shared residential apartment for a year and a half before the sale of the apartment upon separation. She is entitled to exemption from appreciation tax, even if she sells the apartment immediately after she bought half of the apartment from her spouse during the divorce.”
3. Buying an apartment from the divorcee. Years after the divorce
Taxation Decision – 68/06
■ facts: Spouses divorced and it was decided between them that the woman would continue to live in the shared apartment until the shared minors reached the age of 18, then the property would be sold and divided according to the percentages determined between the spouses. The settlement was approved by the Family Court. Later, the wife asked to buy the relative share of the divorced man, and accordingly they asked to amend the judgment of the family court.
■ The question of taxation: The couple applied to the tax authority with a request to determine that all the rights in the house will be transferred to the wife (who will buy the divorced man’s share) and that this will not be considered an appreciation tax event for the divorced man and a purchase tax event for the wife.
■ The tax decision: Although years have passed and the settlement was not settled in the original ruling of the Family Court, where the court corrects the original settlement and it is anchored in a financial agreement in the event of a divorce, this does not constitute a ‘sale’ in accordance with the provisions of Section 4A of the Real Estate Taxation Law – and the spouses are not liable for tax praise and purchase tax respectively.
Attorney (and CPA) Daniel Passerman, Head of Taxes at Gornicki & Co., notes that “literally it may be that the words do not emerge clearly from Section 4A of the Real Estate Taxation Law, but the purpose of the law and its rationale are clear – to facilitate divorce proceedings, which By their nature, they are also complex, and moreover the need to pay excess taxes on spouses, who start a separate path as economic units each separately. Therefore, the Tax Authority accepted the couple’s request and considered the purchase of the apartment by the wife as an event that is not a tax event liable for purchase tax and appreciation tax. It should be noted that this was also decided in Taxation Decision 34/07”.
4. How to calculate the value of an estate in a divorce settlement
Psad Telham 70960-12-20
■ facts: Their spouses have an estate in Moshav and have decided to divorce. The husband petitioned that when he comes to purchase her share of the estate from the wife during the divorce, the value of the estate will be calculated in “net” values, and this is because it is possible that in the future he will sell his rights to third party and will have to bear all the tax payments – among other things, appreciation tax. “The court ruled that in view of the husband’s statement that he wishes to continue to maintain the farm – the purchase of the wife’s share in the property will be carried out according to the ‘gross’ values, without the conceptual offset of tax payments,” explains Attorney Wiseman.
■ The legal question: To whom will the appreciation tax payments be applied after the division of the property between the parties, when one of the spouses receives the property and the other receives half of its value. Will the value of the property be calculated after a theoretical offset of the future real estate tax payments in the event of a future sale of the property to a third party?
■ Court ruling: It was determined that in view of the husband’s statements, the wife will not be required to pay the tax. “With regard to real estate, the solution is similar to the solution given in the matter of residential apartments purchased by one of the spouses, and it must be settled in the divorce agreement and stipulate that if the property is sold in the future to a third party, both parties will be required to pay their proportional share of the appreciation tax or at the very least take into account the existence of the future tax and balance it In a different way at the time of the agreement,” explains Attorney Wiseman.
5. Can spouses be considered a separate unit
AA 4298/18 Director of Real Estate Taxation Tel Aviv v. Roy Blank
■ the facts: Spouses who lived as a single economic unit in all areas of life, except for real estate (as part of the financial agreement they made between them, they established separation in relation to the real estate they own), and lived together in the property of one of the spouses.
■ The legal question: Should they be considered completely separate (an exception to the “family unit rule”) regarding eligibility for exemption from capital gains tax and relief from purchase tax regarding a transaction in a qualifying residential apartment or unit.
■ Court ruling: The Supreme Court ruled that even an “incomplete” separation of property can be an exception to the “family unit rule”, according to which the spouses are considered as one unit for the purposes of eligibility for exemption from capital gains tax and relief from purchase tax regarding a transaction in a qualifying residential apartment or unit. “It was determined that as long as property separation is maintained in relation to the real estate assets, the fact that the two spouses conducted themselves as one economic unit in the other areas of life and even lived together in an apartment that belongs to only one of them – will not prevent them from being considered as individuals with regard to the real estate assets and receiving an exemption from appreciation tax and relief from purchase tax” , explains Adv. Wiseman. According to her, “In cases like this, the existence of a financial agreement that stipulates property separation and that was signed ahead of time (and not just before the sale of an apartment) – is critical.”
Adv. Weissman adds that the Supreme Court’s ruling allows spouses to establish in advance that there will be property separation not only with respect to existing real estate assets, but also with respect to future ones: “For example, spouses have stipulated in a financial agreement that separation will apply regarding real estate and accumulated funds prior to the marriage, so that the residential apartment will be registered only in the name of one of the spouses and the other spouse will receive the right to reside in the apartment as a ‘permission bar’. When the spouse who is not the owner of the property, inherits and/or receives as a gift and/or purchases another apartment, it will be registered in his name. In such a case, each of the winning spouses will be exempt from real estate taxation in a personal opinion.”