The tax laws in Israel change at a quick pace. Long-standing legislation is frequently modified, and court rulings dramatically change the interpretation of the laws and regulations. The following is a summary of two changes that considerably impact real estate taxes.
Purchase tax rate for new immigrants (Olim)
The Purchase Tax Regulations were modified recently with respect to the beneficial purchase tax rate for Olim.
On the one hand, the tax rate was changed dramatically so that eligible Olim will pay less tax when compared to the old rate. On the other hand, new limitations were introduced which exclude many Olim from being eligible for the new rate.
Eligibility:
As the old regulations applied to a second property, they were especially advantageous for Olim who owned an investment property prior to purchasing their primary home. In contrast, the new regulations only apply to Olim who are purchasing a "single property". So, Olim who already own a property will not be eligible for the new rate – unless they commit to sell their old property within 18 months of purchasing the new one. This is the most notable change in the scope of eligibility.
Additionally, the new rate cannot be applied to properties purchased for more than approx. ILS 20,183,000.
Finally, the new rate does not apply to commercial property. When Olim purchase commercial property for their business (as opposed to a passive investment) the old rate will apply.
Rate:
The new rates are:
- 0% on the purchase value until approx. ILS 1,978,000.
- 0.5% on the purchase value between approx. ILS 1,978,000 and ILS 6,055,000.
- 8% on the balance of the purchase value (unless the value exceeds approx. ILS 20,183,000, see above).
This contrasts with the old rate, according to which the 0.5% bracket started from the first Shekel and extended to approx. ILS 1,990,000 instead of ILS 6,055,000. Due to the above changes in the tax brackets, the tax paid by Olim will decrease dramatically.
For example, according to the old rate for Olim, the tax on a property of ILS 3,500,000 was approx. ILS 85,500 and the tax on a property of ILS 6,500,000 was approx. ILS 235,500.
However, according to the new rate for Olim, the tax on a property of ILS 3,500,000 is approx. ILS 7,600 and the tax on a property of ILS 6,500,000 is approx. ILS 56,000.
It should be noted that most tax offices in Israel will not allow Olim to apply the beneficial rate until they live in the purchased property for several months. So, Olim are often required to pay one of the higher tax rates and then apply for a refund of the difference. If the application is accepted, the difference between the higher and lower tax rates is returned with interest. For this reason, it is often advisable that Olim initially include a higher tax rate in their budget until the use of the beneficial rate is approved.
Retroactive application:
Many Olim have asked me if the new rate can be applied retroactively to transactions that took place before the new regulations came into effect. According to the wording of the regulations, the answer is no.
The new regulations apply to contracts signed after August 15, 2024. The new rate cannot be applied to transactions that took place before then. However, Olim who received citizenship before August 15, 2024, may choose to apply either the old tax rate or the new tax rate – if their contract is signed after the above date
Increase in the Value Added Tax rate
The Minister of Treasury signed an order increasing the Value Added Tax (VAT) rate from 17% to 18%. This change will take effect in January of 2025.
While this will apply to all goods and services subject to the VAT law, it is important to note the implications for those who purchased a property "on paper" or "firsthand" from a developer. VAT applies to firsthand purchases and each payment to the developer includes a VAT component. For example, when purchasing a firsthand property for ILS 3,500,000, the buyer effectively pays ILS 2,991,453 to the developer and NIS 508,547 to the government in the form of VAT.
As the VAT rate increases, all payments made to developers in 2025 will effectively increase as the VAT component will be higher.
For example, if the property was purchased in 2024 and there is an outstanding balance of NIS 1,000,000 due in 2025, the payment due to the developer will be ILS 1,008,547. The difference of ILS 8,547 is due to the increased VAT rate.
Due to this change, it is advisable to explore the option of paying the developer before 2025 to avoid the additional VAT payment.
A mistake in applying the various rates or in the tax strategy can lead to tens or hundreds of thousands in unnecessary tax so it is important to consult with an expert before any real estate transaction.
Contact information:
Michael ("Mickey") Levine, Adv.
25 KK"L St., Jerusalem
Israel Tel: 02-560-9717
US Tel: 646-568-5510
Email: Mickey@levinelaw.co.il
Web: Levinelaw.co.il
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