21.09.2010

Did the Children of Israel, on their wander through Sinai, sell their Succot to each other? And if they did, was this a taxable event? Not an easy question, because a Succah (Tabernacle) is a temporary structure and it all happened so long ago. Or did it?

The vacation home dilemma

Recently, the Israeli Tax Authority (ITA) saw the need to issue guidance on a modern version of the above question – does the sale of a vacation home (Dirat Nofesh) qualify for exemption applicable to residential homes? (Real Estate Taxation Instructions Number 5/2010, issued August 11, 2010). This question remained uncertain for many years.

When are you exempt?

The general rule is that you are exempt from land appreciation tax (=capital gains tax on Israeli real estate) if you sell your only home in Israel after holding it at least 18 months. Alternatively, if you own more than one home in Israel, you may claim an exemption upon a sale of one of them once every 4 years. When land appreciation tax applies, the rate ranges from 20% to 45%, depending on when the property was purchased. For the purchaser, there is acquisition tax of up to 5%, which is slightly reduced if buying your only home in Israel. Homes abroad are ignored. But if the land is more than half a dunam, the ITA will probably tax the excess as more than you need for a garden.

What is a home?

The real estate tax law defines a ‘‘qualifying residential home‘‘ as one occupied as a home during the 4 years preceding the sale or 80% of the time it was owned. But is a vacation home any different from any other home?

Tax Authority Guidance

The ITA guidance points out that matters came to a head in an Israeli Supreme Court judgment handed down in 2006 dealing with homes designated under planning rules as vacation homes in the Herzliya Marina which were being marketed as regular homes (Civil Appeals Case 2273/03). The Court ruled that the term ‘‘vacation home‘‘ means, ‘‘both subjectively and objectively, a home designated for public use and leisure. Such use rules out regular permanent residence in the place‘‘. The Court went on to comment that:‘‘Showing a relaxed approach to the planning laws…merits a firm reaction by the law and order bodies…It is necessary to determine that the use of such apartments is mainly for public use, therefore they should be placed at the general public‘s disposal in any way for… more than half the year in total…‘‘

And in an earlier case, it was held that if a person could only use an apartment for a limited period (2 months per year in this case), it cannot be said that person lives in it and uses it as his home (Mandel vs. Land Appreciation Tax Director, appeal 22/89).

What will the ITA look for now?

The ITA apparently regards itself as a law and order body. Therefore, when reviewing a vacation home transaction, the ITA will want to check out a number of things according to its guidance. First, the ITA will review the sale agreement to see if it mentions the planning permission designation of the property, and whether it requires the property to be placed at the general public‘s disposal for leisure purposes for most of the year, via a management company or in some other way. If the agreement is silent on these aspects, the ITA may ask to see the relevant planning permission. Nevertheless, there may be a few older vacation homes dating back before the Herzliya judgment where the municipality and planning authority has accepted the residential use and imposes city taxes accordingly – the ITA will accept the residential use of the vacation home if the seller can prove such residential use was legal.

Festive Joker?

The above leaves one mischievous little tax planning question. How would the ITA relate to a sale of two or three Succot, presumably sanctioned by the Torah, on a dunam of land…?

Wishing all our readers a Happy Succot and Moadim LeSimchah

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

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The writer is an international tax specialist at Harris Consulting & Tax Ltd.