The writer is an expert in real estate taxation
Here is another proof that many times tax planning is mainly intended to overcome a tax trap and to pay more tax, and not to avoid/evade tax payment.
In January 2019, a couple purchased land in the settlement of Azor, on which an old residence stands. After the purchase, the buyers began to divide the lot in order to sell half of it, to demolish the existing house and build a new house. As part of the purchase tax assessment they made and submitted, the buyers stated that we were dealing with the purchase of a residence.
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Since at the time this was not their only apartment, they paid a full purchase tax of NIS 400,000. Later, after selling their original apartment, the couple submitted a request to the tax administrator to correct the purchase tax assessment and place it on the amount of purchase tax applicable to a single apartment – NIS 162,000.
Apartment?
At first, the manager complied with the aforementioned and corrected the assessment, but immediately afterwards he announced that in his opinion it was not a matter of purchasing a residential apartment at all, but actually of purchasing land for construction, and therefore a purchase tax as land in the amount of NIS 250,000 must be paid.
In a normal case, purchase tax on an apartment will be paid when an apartment is purchased that is used or intended for residential use by the buyer. The courts and scholars have ruled in the past that it is not enough to objectively examine the actual potential of living in the property (meaning that we have a residential apartment that can be used), but the buyer’s intention to use the purchased apartment for living (subjective test) is also required.
It is true that a taxpayer who owns additional apartments and purchases a residential house for demolition would prefer to claim that he is actually purchasing a lot, since that way he will pay a purchase tax at a rate of 5% instead of 8%. On the other hand, if it is a taxpayer who purchases an alternative apartment to his only apartment, even if it is intended for demolition, then it would be preferable to declare to the tax authority that despite the intention to demolish it, we are dealing with a residential apartment. In doing so, he will seek to benefit from purchase tax rates for a single apartment that are significantly lower than the purchase tax rate for the purchase of a building plot (5%).
In the case before us, the court was under the impression that there was an intention to destroy the existing house, and therefore the couple could not benefit from a reduced purchase tax rate as the purchase of the residential apartment. The court relied on the fact that the purchasers worked diligently to demolish the existing house immediately after the purchase.
Immediately after the purchase, they worked to produce a measurement map from which there is an intention to demolish the house, and within 11 months from the date of purchase, an application was submitted for a permit to demolish the existing house and build two housing units. The couple believed that the fact that the demolition was carried out only two years after the purchase date – that is, a long time after the purchase, should help them that it is still an apartment purchase. But this fact did not particularly impress the court – this is in light of the sequence of preliminary and quick actions they carried out in order to build the new house.
The necessary caution
From a review of the current ruling and previous rulings on the subject (V.E. 58675-09-14, V.E. 9750-12-11) it seems that it is mandatory to correctly plan the steps taken after purchasing an apartment intended for demolition, and this according to the buyer’s taxation situation.
Failure to take the necessary precautions may lead to the payment of unnecessary purchase tax. I will formulate some rules of thumb as follows: If we are dealing with a person with multiple apartments who purchases an additional residence for the purpose of demolition and new construction, it is recommended that he act as soon as possible to obtain a building permit for the demolition of the existing house and the construction of the new house.
He will also try to demolish the existing house within two years from the date of purchase. On the other hand. If it is a person who purchases a replacement residence for the one he owns, he is advised not to act immediately after the purchase to promote a building permit, nor to demolish the existing house within two years from the date of purchase, but to rent the new house or live in it for a period of time before the demolition. At the same time, of course, he must sell the original house within two years from the date of purchase of the new house, in order to enjoy an exemption from capital gains tax on the sale of the original apartment and payment of purchase tax as a single apartment on the purchase of the new house.
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