Israeli Tax Authority Must Refund Unlawful Tax On Home Sales – Are You Due A Refund?

An Israeli court has just ordered a refund of tax unlawfully collected by the Israeli Tax Authority (ITA) on the sale of certain homes in Israel between 2007 and February 28, 2023. Total tax refundable is estimated at NIS 118 million. If you sold an Israeli home then, could you be one of the lucky tax refund recipients? Read on and consult your advisors soon if relevant.

Main facts:

The case was a class action after earlier assessment appeal procedures had been exhausted (Adv Chen Reshef vs The Israeli Tax Authority, District Court decision 42666-01-20 of May 23, 2024). The class action petitioner (taxpayer) sold a home in Israel in 2019 for NIS 900,000 which had cost NIS 446,460 back in 1996. The problem was the ITA increased his gain by around NIS 109,000 by adding back notional depreciation (“depreciation recapture”), which he had never claimed.

This depreciation recapture doubled his liability to land appreciation tax (the tax on Israeli real estate capital gains) from  around NIS 10,000 to NIS 19,646. The idea is to allow a cost deduction only once.

The ITA justified depreciation recapture in this case by saying the petitioner had previously rented out the home for a low rent that was exempt from tax – around NIS 5,000 (currently NIS 5,654) per month. The ITA said that landlords who elect to pay 10% tax (Tax Ordinance Section 122) on home rental income are expressly liable to depreciation recapture when selling the home concerned. Therefore, the ITA surmised depreciation recapture ought to apply to exempt rental income too, in ITA Tax Circular 5/2007. Annual tax depreciation rates in Israel typically range from 2%-4% of the cost of the building element.

The rental exemption was designed to encourage landlords to rent out single rooms or cheap apartments to Soviet/Russian immigrants.

The judgment:

The Court strongly disagreed with the ITA’s interpretation of the law and ruled in favor of the petitioner. The Court also ordered the ITA to repay excess tax paid with interest (4% above the rate of inflation per year) to all relevant taxpayers between 2007 and February 28, 2023. That was the date the class action was allowed to proceed.

Why did the Court decide this?

First, the rental exemption rules were enacted under separate legislation three years after the 10% tax amendment. The rental exemption legislation did not require depreciation recapture upon a sale.

Therefore, the ITA lacked statutory authority to tax notional depreciation recapture if rental income had been exempt (rather than taxed at 10%).

Second, the ITA had failed to notice that the 10% tax rate was on gross income and thought to give a similar tax yield to regular Israeli tax on rental income net of depreciation and other expenses. So, the 10% tax rate was not really a reduced tax rate.

Third, by contrast, the rental exemption was an outright exemption, not a deferral of tax until the time of sale via depreciation recapture.

Fourth, the ITA published guidance in 1990 saying there should be no depreciation recapture after enjoying the rental exemption. In 2007 the ITA did an abrupt U-turn with no real reason in Tax Circular 5/2007.

Fifth, the ITA cited as a reason the fact that generally accepted accounting principles (GAAP), and certain rules in the Tax Ordinance, sometimes require expenses to be offset against corresponding income. The Court totally rejected this argument in the case of depreciation not claimed due to the rental exemption. The law overrides GAAP.

Sixth, the Court ruled the ITA had no right to make taxpayers choose between alternative tax breaks if they were eligible for both – rental exemption and no depreciation recapture upon sale.

Seventh, the ITA relied on earlier real estate tax tribunal decisions in favor of the ITA. The Court said the tribunal decisions only applied to the parties concerned, nobody else.


The judgment heavily criticizes the ITA for its cavalier unlawful behavior. The ITA is a state body serving the people that must have authority for all its actions.

This was a class action previously found to have merit and allowed to proceed by the Israeli Supreme Court. It remains to be seen whether the ITA will appeal the decision back to the Supreme Court.

Readers who sold low-rent homes should check if they were subject to unlawful depreciation recapture tax and whether a tax refund is claimable from the ITA.

So should people who sold vacation homes in Israel that were not rented out.

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 4.6.2024

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