Capital gains tax on real estate sales in Israel
Are you planning to sell an apartment in Israel?
Be aware that taxation on real estate sales in Israel has changed in 2018.
In this article, we'll summarize the 6 major changes.
The main change is the system of taxation over a "linear" period. Partial capital gains exemption on real estate sales in Israel. We'll explain this in detail at the end of this article.
Real estate tax law before the 2013 reforms
To better understand the drastic change in the taxation of real estate sales in Israel, we need to understand what the law was like before the reforms. Any apartment owner in Israel, regardless of the number of apartments he owned, could sell an apartment every 4 years. If the 4-year waiting period was respected, the capital gain was totally tax-exempt.
With the real estate market in Israel having completely changed, the Israeli government, wanting to stem the real estate bubble in Israel, decided to radically change the taxation of residential property. The 4-year sales exemption has been abolished.
The problem is that you can't cancel a law retroactively.
There was therefore a transition period from January 1, 2014 to December 31, 2017.
In the following paragraphs, we'll summarize the law and the changes that have taken place since then.ALSO READ: Taxation on property income in Israel.
The limit on the number of apartments sold at a preferential tax rate has been lifted
As a result, linear taxation at a preferential rate can be calculated without a limit on the number of apartments sold, and without a time limit from one sale to the next.
Previously and throughout the transition period fixed by law - from 01/01/14 to 31/12/17- an owner could only sell two apartments at a preferential tax rate. This temporary limit on the number of apartments that could be sold ended on 12/31/2017.
From 01/01/2018 it is possible to sell more than 2 apartments at a preferential tax rate. (Linear calculation).
Sale of part of the apartment
As mentioned above, during the entire transition period it was possible to sell just 2 apartments at a preferential tax rate.
But there was also doubt as to whether the preferential tax rate would apply to the partial, rather than total, sale of the second apartment.
From 1/01/2018 there is no longer any doubt, and it is perfectly possible to sell only part of the second apartment and still benefit from a preferential tax rate.
Sale between relatives
There is no longer any limit on the preferential tax rate for sales between close relations.
As a result, if a person decides to sell a property to a relative, he or she will be able to benefit from the preferential tax rate via the linear calculation.
It was therefore advisable if you were in this situation to wait until early January 2018 to carry out the transaction and obtain this new tax advantage.
Sale of an apartment received as a gift
Until the law was changed, a person who had received an apartment as a gift during the transition period had to wait and respect a limit known as the "cooling-off" period. During this period, they could not benefit from the preferential tax rate when selling their apartment.
This limit no longer exists from January 2018 and it is possible to have a preferential tax rate even when selling an apartment received as a gift.
Relief in the definition of a single apartment in order to obtain exemption from taxation
The change is that a person owning a single apartment on the day of the sale of said apartment will be able to benefit from a tax exemption on the sale. פטור ממס שבח.
Previously, it was stipulated that if a person had more than one apartment on 1/01/2014 and decided to sell the only remaining apartment during the transition period, he or she would not benefit from the tax exemption. This is the case even if, on the day of the sale, there is only one apartment left.
So if Mr Cohen had 2 apartments on January 1, 2014 and sold one apartment on February 15, 2014. On June 15, 2014, Mr Cohen received a purchase proposal for his 2nd apartment, he could not benefit from a tax exemption on this sale even though he only had one apartment left at that date.
From now on, only the number of assets on the day of the sale will count towards the tax exemption, and not the number of assets in the buyer's possession on 1/01/2014.
Linear" calculation of real estate capital gains in Israel: partial capital gains exemption - לינאריות
As we explained at the beginning of this article, prior to 2014, the sale of an apartment in Israel could be exempted from tax. tax on capital gains if residential properties were sold no more than once every 4 years.
As of 2014, this law has been annulled. However, as the Israeli government cannot cancel a law retroactively, it has introduced a linear taxation system.
According to this calculation method, capital gains realized between the purchase of the property and 12/31/2013 will be exempt. Capital gains realized from 1/1/2014 until the sale of the property will be taxed.
Let's take a look at a few examples:
To make this example easier to understand, we assume that inflation was zero during these years.
- Mr Levy bought an apartment on January 1, 2005. He is reselling the apartment on December 31, 2018. He will therefore have owned the property for 14 years. The purchase price of the apartment, including all costs, was 1 million and the sale price was 2.5 million shekels. The capital gain is therefore 1.5 million. Thanks to the linear calculation, 9 years out of the 14 years the property is held will be exempt (i.e. 9/14 of the capital gain); and 5 years out of the 14 years the property is held will be taxed, (i.e. 5/14 of the capital gain). In our example, the capital gain taxed will be 535,714 Shekels. (Capital gains tax rate: 25%).
- Mr Cohen bought his apartment on June 1, 2015 for one million shekels and sold it on July 20, 2018 for 1.3 million shekels. In this case there will be no linear exemption and the 300,000 shekel capital gain will be taxed at 25%. (The linear calculation only benefits property purchased before 1/1/2014).
In a nutshell:
The changes introduced from January 1, 2018 have greatly benefited property owners who have held property for several years.
In fact, they can benefit from a very high exemption on the capital gain realized, thanks to the linear calculation.
Curbing the rise in real estate prices in Israel.
To avoid costly mistakes, we recommend that you consult specialists in Israeli taxation.