PURCHASING TAX IN ISRAEL
By Debbie Rosen-Solow, Adv
If you thought that the cost of buying a property in Israel amounts to the sale price of the property plus some minor expenses, you thought wrong. Aside from the sale price, one needs to take into account many further expenses such as inspection and lawyer’s fees, registration costs and last but not least taxes. All this - before any changes and renovations are made to the property and before shopping for that new couch, a dining room set and the pink towels that match the bathroom.
When purchasing property in Israel, the buyer incurs a purchasing tax. This tax can run between 0%-10% of the purchase price on a sliding scale, depending on the value of the property, the type of property and the status of the purchaser. In general, every property in Israel is taxed at 6% of the sale price, except for residential properties. In the past most buyers would typically incur a lower tax rate when purchasing a residence than when purchasing land or other properties. However, according to the latest tax reform, this is not necessarily the case anymore.
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Purchase of a Sole Residential Home in Israel for Israeli Residents
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Taxes on the purchase of one's sole residential home in Israel are staggered and levied at five levels, according to the purchase price. The tax percentage of all five levels is updated yearly on the 16th of January. Current levels (as of January 16, 2020 and through to January 15, 2021) are:
On up to 1,744,505 NIS of sales price - 0% tax.
From 1,744,505 NIS up to 2,069,205 NIS- 3.5% tax
From 2,069,205 NIS up to 5,338,290 NIS- 5% tax
From 5,338,290 NIS up to 17,794,305 NIS- 8% tax
Above 17,794,305 NIS- 10% tax
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Based on the figures presented, let's assume that a home in Modi'in costs 2,500,000 NIS. The buyer, an Israeli resident, who is acquiring his first residential home in Israel and is not entitled to any special benefits, will have to pay a purchasing tax of 32,905 shekels. The calculation is as follows:
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Conversely, when buying an apartment at the cost of 1,744,505 NIS no tax would be levied at all.
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Second Residential Home
When purchasing an additional home, or if you are not an Israeli citizen and resident, the tax is calculated at five levels that start at 5% and go up to 10%.
Current levels (as of July 29, 2020 and through to January 15, 2021) are:
On up to 1,292,280 NIS of sales price - 5% tax.
From 1,292,280 NIS up to 3,876,835 NIS- 6% tax
From 3,876,835 NIS up to 5,338,290 NIS- 7% tax
From 5,338,290 NIS up to 17,794,305 NIS- 8% tax
Above 17,794,305 NIS- 10% tax
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Using the buyers from the previous example, the buyer who liked his 2,500,000 NIS Modi’in house so much that he decided to purchase an additional identical second house, would have to pay purchase tax on this second home in the amount of 137,077 NIS.
The calculation is as follows:
Foreign residents
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In the past, a non-Israeli resident purchasing a sole home in Israel was taxed at the same scale as an Israeli resident purchasing a sole home. According to the recent tax reform, a non-Israeli resident will be taxed at the scale of an Israeli purchasing an additional home, (without any regard to weather this is the purchaser’s sole home in Israel).
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Overlapping
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When buying a home, there may be some overlap between the purchase, and sale of one’s previous residence. During this time, one may end up owning two homes. Theoretically, at the time of purchase of the new home one should be taxed according to the higher tax levels as a second home owner. Nonetheless, the law recognizes this overlap as a temporary status. It allows individuals to pay a lower tax level on their new home if they have sold their old home within 18 months after the purchasing date of their new home, or 12 months from date of possession, when purchasing a firsthand home from a contractor.
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New Olim
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New Olim purchasing a home in Israel can choose to be taxed either as Olim or as Israeli residents. Furthermore, according to the new tax reform, Olim are entitled to use the Israeli resident’s “sole residence scale” if they purchased their sole apartment in Israel up to two years before their Aliyah.
New Olim who purchase property in Israel a year before or within seven years after their Aliyah date, are entitled to a one-time discounted purchasing tax rate according to the Oleh scale. However, at the current tax levels, many Olim are better off not using the Oleh scale when purchasing a sole home, as the tax according to the sole residence purchase scale will be lower. In fact, an Oleh will only benefit on a first home purchase when filing as an Oleh if the price of the property is greater than 5,495,545 NIS.
On the other hand, Olim will benefit greatly from the Oleh scale when buying a second home or any additional home. I recommend that Olim compare both scales before declaring their Oleh status and exercising the Oleh tax scale.
If you purchase a property and are entitled to use the Oleh scale and choose to use it, the current tax is 0.5% of the sale price on the first 1,838,615 NIS and 5% of the sales price on the remainder.
Based on the figures presented, if that same buyer from the previous example decided to make Aliyah just before purchasing the additional identical home to the one he already owns, at that costs 2,500,000 shekels, and exercise the Oleh scale, the purchasing tax would amount to 42,626 NIS, as follows:
As mentioned above, this is higher than an Israeli with a sole residence pays, but significantly lower than an Israeli would pay on a second residence.
If only one spouse is a new Oleh, the couple may still be entitled to new Oleh reduced rates. A person requesting the Oleh discount must provide the documentation from Misrad Hapnim (Ministry of the Interior) in order to prove their status.
The reduced purchasing tax granted to new Olim applies to the purchase of the following property types: A residential property purchased for living or for a combination of living and business use; a place of business and an agricultural plot that functions as a place of business for the new Oleh and/or his relatives (as defined by The Property Taxation Law), and a plot of land – subject to size restriction.
Hopefully, this article made some sense of the complexities of purchasing tax, and will help guide you towards understanding how this tax might apply in your situation. Nevertheless, proper legal consultation is imperative and should be sought before embarking on your next real estate transaction.