Michael Shine & Partners
Property Purchase in Israel
Pursuant to section 9(a) of the Land Taxation (Appreciation and Purchase) Law 5723-1963 (“the Law“), Purchase Tax (akin to Stamp Duty) is chargeable on every purchase of a right in real estate or of a right in a real estate association:
“in the sale of a right in real estate the purchaser will be charged with land purchase tax (hereinafter – Purchase Tax); the Purchase Tax will be at a rate determined by the value of the sale or at a fixed sum, according to the type of sale or real estate, as determined by the Minister of Finance with the approval of the Knesset Finance Committee, and provided that the sale of a right in real estate that is not a residential apartment to a purchaser who is a member of a purchase group, the sale value will be the sale value of the constructed asset, which is not a residential apartment”.
Real Estate is defined in section 1 of the Law as “land in Israel, including houses, buildings, and other things that are permanently attached to the land” such as: residential apartments, commercial real estate, offices, agricultural plots and more.
The term “right” in real estate is defined in the Law as a right of “ownership” or “leasehold” rights for a period that exceeds 25 years, and similarly a license to use the real estate that can be deemed as ownership, or a lease for the aforesaid period.
The term “sale” within the meaning of the Law includes the transfer of a right in real estate for consideration or without consideration, including the waiver of a right in real estate.
A transfer resulting from a divorce, inheritance of a real estate property, the granting of a right in real estate to a trustee, guardian, receiver, liquidator etc. do not constitute a sale for the purposes of real estate taxation.
According to the Law every purchaser of a right in real estate is required to submit to the Land Taxation Authority a declaration regarding the purchase within 30 days from the date the parties signed the sale contract. The purchase tax needs to be paid within 60 days from the date the parties signed the sale contract.
Purchase tax is determined at a rate derived from the total value of the transaction (including VAT, if applicable).
The Law and the Land Taxation Regulations (Appreciation, Sale and Purchase) (Purchase Tax) set the purchase tax rates according to the type of property purchased. In addition, they determine the conditions for obtaining a full or partial exemption from tax. The various tax rates are updated once a year.
The Law creates a distinction between a “residential apartment” and other properties –
Section 9(c) of the Law defines a “residential apartment” as one of the following:
- An apartment that is used or is intended to be used for residential use, including an apartment whose construction has not yet been completed, except for an apartment where there is no obligation on the part of the seller to complete the construction;
- A right in a real estate property sold to a purchasing group, which is intended to be used for residential purposes.
The rate of the purchase tax with respect to properties which are not “residential apartments” as defined above, is a fixed rate of 6% on the entire value of the property.
By way of numerical example: the purchaser of land worth NIS 2,500,000 will pay tax in the amount of NIS 150,000 (6% * 2,500,000).
As an exception to this purchase tax rate, it was determined that with respect to the purchase of a building plot, which at the time of the contract between the parties has a valid construction plan that allows at least one residential apartment and for which a building permit was obtained for at least one residential apartment within 24 months of the purchase, the assessment of the purchase tax will be amended to a rate of only 5%.
When buying a residential apartment intended for demolition it will be possible to treat the transaction as the purchase of land, and the taxation will be applied accordingly.
It is important to mention that “vacation apartments“, according to the position of the Israel Tax Authority and the ruling of the Israel Supreme Court, do not constitute “residential apartments” for the purposes of purchase tax, and they are taxed according to the fixed tax rate of 6%.
When purchasing a “residential apartment” the rate of the purchase tax will be calculated according to value brackets and each bracket will have its own separate rate.
In addition, there is a sub-distinction in the Law between the brackets in a standard calculation and the brackets when calculating the tax for a purchaser who will only hold a single apartment:
Standard calculation – will apply to whoever owns more than one residential apartment.
Calculation for a single apartment – will apply to an individual who is a resident of Israel and is purchasing his only apartment, or who undertakes to sell the apartment he concurrently owns within 18 months from the date of purchase of the new apartment, or within 18 months from the date the new apartment is received from a contractor.
In the calculation of the tax for a single apartment, there is an exemption from purchase tax up to a specified amount (currently NIS 1,747,865), and there is additionally a relief within the tax brackets as follows (based on current rates):
For the part of the value that is up to NIS 1,747,585 – no tax will be paid.
For the part of the value that exceeds NIS 1,747,865 and up to NIS 2,073,190 – the tax rate will be 3.5%.
For the part of the value that exceeds NIS 2,073,190 and up to NIS 5,348,565 – the tax rate will be 5%.
For the part of the value that exceeds NIS 5,348,565 and up to NIS 17,828,555 – the tax rate will be 8%.
For the part of the value that exceeds NIS 17,828,555 – the tax rate will be 10%.
By way of numerical example: the purchase tax that will be paid in the purchase of a “single residential apartment” in the sum of NIS 2,500,000 will be NIS 32,727, as the sum
up to NIS 1,747,565 will be exempt from purchase tax, the amount from NIS 1,747,865 and up to NIS 2,073,190 will be taxed at 3.5%, and the balance will be taxed at 5%.
However, in a standard calculation for a non-single apartment or for a non-Israeli resident, there is no tax exemption, and the percentages of the tax brackets will be higher.
The calculation of the tax will be done according to the following brackets:
For the part of the value up to NIS 1,294,770 – the tax rate will be 5%.
For the part of the value that exceeds NIS 1,294,770 and up to NIS 3,884,295 – the tax rate will be 6%.
For the part of the value that exceeds NIS 3,884,295 and up to NIS 5,348,565 – the tax rate will be 7%.
For the part of the value that exceeds NIS 5,348,565 and up to NIS 17,828,555- the tax rate will be 8%.
For the part of the value that exceeds NIS 17,828,555 – the tax rate will be 10%.
By way of numerical example: the purchase tax that will be paid in the purchase of a “residential apartment” in the sum of NIS 2,500,000 is NIS 137,053, as the sum up to NIS 1,294,770 is taxed at 5%, and the balance is taxed at 6%.
The special tax brackets applicable to a single apartment purchase will only apply to an Israeli resident individual, and therefore when a foreign resident and/or corporation will purchase a residential apartment they will pay purchase tax according to the “standard calculation”, and they are not entitled to enjoy the relief of the reduced purchase tax brackets for a single apartment.
Transfer of real estate to a relative without payment of any consideration is subject to purchase tax, but at a reduced rate. The Land Taxation (Appreciation and Purchase) (Purchase Tax), Regulations 5735-1974 stipulates that in a transfer without consideration to a relative, the recipient of the right will benefit from a reduced purchase tax which will be one third of the purchase tax that would have applied to the recipient of the right if he had purchased the land in exchange for consideration.
According to the Law a “relative” is defined with respect to purchase tax as a spouse (including whoever was a spouse during the six months preceding the transfer), a parent, a descendant, the spouse of a descendent, a brother or sister.
Lastly, the Purchase Tax Regulations grants special purchase tax rates to whoever is defined by law as a new immigrant, a casualty of a terror attack, or whoever has been classified as disabled/blind.
For example: a new immigrant who is purchasing an apartment will enjoy a (one-time) benefit of a reduced purchase tax of 0.5% on the sum up to NIS 1,842,155 (current figure) and a tax rate of 5% on the part above that sum.
