Illegal Residence – Sale Exemption Tricky

What happens if you are resident in Israel and sell a home you lived in without proper planning consent – do you get the exemption from Land Appreciation Tax (LAT, or Mas Shevach in Hebrew)? Or do you pay LAT at rates ranging up to 50%? Over the years many Israeli court decisions have gone against the taxpayer, but in the Stein case the taxpayer managed to scrape a win in the Israeli Supreme Court on November 14, 2022 (Tel Aviv LAT Director Vs. Stein, Civil Appeal 1073/20).

What does the law say?

A residential home is defined in the Real Estate Taxation Law as: a home or part of a home, the construction of which is finished, which is owned or leased by an individual, and is (1) used for residential purposes or (2) is intended for residence according to its nature, except a home that represents business inventory for income tax purposes.

If an Israeli resident sells their only residential home in Israel worth up to NIS 4,603,000 (in 2022, update for 2023 expected soon) they may enjoy an exemption from LAT on the sale gain. Above that, the LAT tax rate is often 28% but it can range from 25%-50% , depending on other income that year and when the property was acquired.

Overview of some past cases:

Past cases upheld the rule of law, i.e. the need for residential use planning consent, not only physical residence in a property. Therefore, in the Hachim Case (Civil Appeal 1046/12) the Supreme Court ruled that a property with planning consent as a vacation home (Dirat Nofesh in Hebrew) not a residential home (Dirah LeMegurim) did not qualify for an LAT exemption. In the Gabbay case (44579-08-14), no LAT exemption was allowed for a chicken coop illegally converted to a residential unit just before it was sold. In the Guy case (34577-08-17), no LAT exemption was granted for a storage room and a laundry room.

The Stein Case facts:

In the recent Stein case, the property in question was a residential unit built in 1945 on the ground floor and was designated as a storage area, garage and open space between the pillars of the building, with an area of around 55 square meters. It had two rooms, a kitchen and a bathroom. In practice it was used for residential purposes for many decades. The taxpayer purchased the residential unit in 1992, and both the seller and the purchaser (the taxpayer) reported the transaction as relating to a residential home and paid taxes accordingly. The taxpayer tried to sell the unit in 2012, but the prospective purchaser dropped out after finding out it lacked planning consent to be used for residential purposes. The taxpayer tried to sort out the matter in 2014 but the Tel Aviv planning committee refused to help. Another prospective purchaser appeared in 2015 but the LA Director refused to grant the residential home sale exemption.

Stein Case Verdict:

The Supreme Court ruled that the residential unit didn’t meet the definition of a residential home in the law but did the case nevertheless deserved to be recognized as an exception? The Court concluded it did, given all the following circumstances: the property was located in a residential area in a residential building; it was used for residential purposes for around 70 years; during that period, no claim against residing there was ever raised; the taxpayer was innocent purchaser in 1992 and paid purchase tax applicable to a residential home; and between 1992 and 2012 the taxpayer paid city taxes accordingly.

Therefore, the Supreme Court ruled that the taxpayer was an innocent person who acted in good faith and was entitled to rely on national and municipal authorities’ to uphold the rule of law since they taxed the property over previous years as if were a residential home. Moreover, the Court saw no reason not to give planning consent for residential use. Therefore, the Supreme Court granted the land appreciation tax exemption upon sale of the property but said this was exceptional.

Back to vacation apartments:

The Supreme Court in the Stein case ruled that no reliance could be made on the tax authority’s policy stated in Real Estate Tax Circular 5/2010 (to allow reliance!) as the tax authorities’ later expressly overturned this policy. LAT now applies to vacation homes.


Be careful what you rely on. The tax authority want you to rely in actual planning consent, not what it might have been.

Next Steps:

Please contact us to discuss any of the above matters further, or any other matter.

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

[email protected]

(c) Leon Harris 8.1.2023

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