Is it possible to sell a property in Israel within 5 years of its purchase? (Without the risk of a "tax accident").
- Is there a risk of being requalified as a property trader in Israel?
- What are the tax consequences of such an operation?
For example, you buy a house in Israel, renovate it and then decide to sell it. All this happens within 5 years of the date of purchase.
The tax authorities in Israel may decide that this transaction meets the criteria of a commercial activity.
Unless you can prove that you carried out the work with the intention of living in the property.
In other words, you have to "prove" to the Israeli tax authorities that your intention was not to realize a "commercial" capital gain when you bought the apartment.
The sale of a single dwelling is exempt from capital gains tax, but if sold within 5 years of purchase, income tax and VAT may apply.
The consequences can be disastrous!
Let's take a concrete example:
You buy an apartment for 2 million Shekels, including ancillary costs. (Lawyers, real estate agent, acquisition tax, etc.).
You carry out work worth 1 Million Shekels.
4 years later, you decide to sell this apartment for 4.5 million Shekels.
You have therefore realized a capital gain of 1.5 million Shekels.
In this case, we have several options for "taxing" this capital gain.
- If it's your only apartment, and the tax authorities consider it a "classic" sale, it's exempt because you only have one apartment.
- If you have several apartments, and the tax authorities consider this to be a "classic" sale, it will be taxed at 25%.
- On the other hand, if the tax authorities consider that this sale meets the criteria of a "commercial" activity, the taxes will be as follows:
- Income tax, up to 50%.
- Bituah Leumi tax: 12%.
- VAT liability: 17%.
As you can see, the difference in taxation can be enormous!ALSO READ: Bitouah Leoumi on passive income
How can I avoid being requalified as a property trader in Israel?
To be exempt from these 3 taxes (income taxBitouah Leoumi and TVA)The buyer will have to prove that he wished to live in the property and that he had no commercial intent behind the purchase.
To qualify for exemption from income tax, bitouah leoumi and VAT on the sale of a property within 5 years of its purchase, you must therefore meet the precise criteria established by Israel's tax legislation:
- Examination of the nature of assets This means whether the investment is for the long term (e.g. residential property) or for current transactions (e.g. land, studio apartment with high added value).
- Transaction frequency the person concerned frequently carries out this type of transaction, which would prove the commercial nature of the sale.
- Scope and financial volume high transaction volume.
- Shelf life : how long the owner has held the property. The shorter the period, the more likely it is that the transaction is of a commercial nature.
- Existence a permanent and continuous mechanism and activity search for new acquisitions. The tax authorities will check whether the seller has a "commercial process" in place.
- Method financing or how the transaction was financed: equity or external financing.
- Knowledge and skills test or if the owner of the property has mastered the field in which the transaction is being carried out. This also applies if he has hired a professional with in-depth knowledge in this field. (Lawyer, real estate agent, etc.).
- Improvement review The tax authorities check whether the owner intends to increase the property's market value through the work carried out.
Deciding whether a property purchased and resold within 5 years should be subject to income tax and VAT, or whether it should be exempt, therefore depends on the "commercial" nature of the transaction.
The decision will be taken by the tax authorities on a "case-by-case" basis, in the light of the above-mentioned criteria.
Your questions - Our advice
- What are the "little tricks" we can use to avoid this commercial requalification?
- Could setting up an Israeli SCI be the solution?
- If the sale is subject to VAT, can we reclaim the VAT on the renovation work carried out?
The "Dray & Dray" accounting firm is based in Jerusalem & Tel Aviv.
We provide day-to-day support for your accounting and tax affairs in Israel.
We also have an English-speaking department specializing in business start-ups and accounting issues in England.
Finally, the firm's real estate department handles tax optimization and real estate issues for owners and investors in Israel.
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