09.01.2011

Bank of Israel acts on housing boom; advice to those seeking to purchase homes in Israel, whether Israeli or from abroad.

They say an Englishman‘s home is his castle, which conveys an air of stability. The present Israeli housing boom seems anything but stable. Will investors get burnt if interest rates rise? Will newly-weds have anywhere affordable to live?

To stem the sharp surge in property prices and boost housing supply, the Israeli government has decided to act. In addition to monetary steps by the Bank of Israel to rein in housing credit, the government has resolved to adopt fiscal measures to boost supply and depress demand for homes in Israel. On January 5, 2011, a draft tax bill was circulated for comment which we summarize below. Note that these measures are still proposals which have yet to be legislated. It remains to be seen what will finally be passed and when.

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Tax on a home sale

Under current legislation, an individual is exempt from Israeli land appreciation tax (capital gains tax applicable to real estate) on the sale of one Israeli home every four years if the seller owns more than one home in Israel.Otherwise, subject to a few exceptions, appreciation tax is due at a rate of 20% on the post-November 7, 2001 portion of the real (inflation-adjusted) portion of the gain, and marginal personal tax rates (up to 45%) apply to the remainder of the real gain.

That tax can deter people from selling. So now it is proposed to grant tax exemption to the sale of a second home in Israel in 2011 or 2012 to encourage sellers to sell more homes onto the market.

Only the first NIS 3 million of sale of the value would be exempt under the proposals – any excess will be taxed on a pro rata basis. For example, if the sale value is NIS 4m., only 1/4 (NIS 1m. excess sale value / NIS 4m. total sale value) of that tax would be payable.

No such exemption at all would apply under the proposals if: (1) the seller was gifted the home without consideration in the period November 1, 2010 to December 31, 2012, or (2) the home is sold to a relative. These restrictions are meant to prevent scheming taxpayers with more than two homes passing them around to others to sell.

If only part of the home is sold, the NIS 3m. exemption would be reduced pro rata. Also the home must be a qualifying home, which is one used for residential purposes in the four years preceding the sale or 80% of the period of ownership

Tax on a home purchase

Another proposal concerns acquisition tax paid by purchasers of real estate. Currently the rate of acquisition tax ranges up to 5% of the value of Israeli real estate purchased. With a view to dampening down the demand for homes, it is proposed to impose acquisition tax on a home in the period January 16, 2011 to December 31, 2012 as follows: 5% on the first NIS 1m., 6% on NIS 1m. – 3m., 7% above NIS 3m.

What does all this mean?

If the proposals are implemented, the combination of supply and demand measures on the tax front may perhaps help bring down home prices in Israel. If you are a foreign (non-Israeli) investor, check also the tax effect in your home country. For example, investors from the US, UK and Canada (to name a few places) may enjoy the new proposed Israeli land appreciation tax exemption, only to pay more capital gains tax in their home country if there is no Israeli tax to credit.

So foreign investors are probably indifferent regarding sales. Investors everywhere may be deterred by the increased acquisition tax, unless they are investing for the long-term and expect to make sufficient overall gain to recover the cost of their investment, including the new tax. And this may not take very long for foreign investors, given the current strength of the shekel.

As always, consult experienced tax advisors in each country at an early stage in specific cases.

leon@hcat.co

Leon Harris is a certified public accountant and tax specialist at Harris Consulting & Tax