Capital Gains Tax and Single Apartment Exemption in Israel
Real Estate Capital Gains Tax is a tax imposed whenever real estate in Israel is either sold or rented for a period of more than 10 years. The tax is imposed on the gain accruing to the seller as a result of the propertys increase in value from the time of its purchase until the date of its sale. This increased value is added to the income of the owners, who pay income tax on it according to their tax bracket. The assessment from the sale of the property usually reaches a tax bracket of 50%.
The tax at this rate is imposed only on the real increase in value, after adjustment for inflationary impacts. Regarding the tax on the increase in inflationary value, a low rate of 10% was paid until now. However, the law was recently changed so that no tax is paid on an increase in inflationary value since 1995.
Within 50 days of executing a real estate transaction, a report must be submitted to the Capital Gains Tax authorities on a special form, and a self-assessment made by the seller. The tax authorities are allowed to approve the self-assessment or to adjust it and demand additional tax. The seller is permitted to not prepare the calculation independently but, in such a case, must report the transaction within 30 days.
The Capital Gains Tax Law grants exemptions from tax in certain cases. For example, the transferring of real property as a gift from one party to a family member is exempt from tax. However, when the recipient of the gift sells the property, tax must also be paid on the increased value that accumulated during the period the property was held by the gift giver. The situation is different in the situation of the special exemption for a residential apartment; in that case, the buyer does not pay tax on the increase in the value of the land during the previous owners tenure.
Exemption for Apartment Dwellings:
Out of consideration for apartment owners who desire to sell or exchange their apartments, an exemption is granted for the sale of an apartment dwelling by a private party. The exemption is only granted for an apartment that is fit for use as a residence, and it does not apply to the sale of apartments still under construction. The exemption is also conditional on the seller selling all rights to the apartment and not retaining any part of them. The exemption also does not apply to unutilized building rights; therefore, for example, whoever sells a private home to which a second floor may be added might be assessed Capital Gains Tax on the value of the building rights that were sold.
The law was adjusted recently so that the abovementioned exemption will only apply to an apartment that was actively used as a residence for at least 80% of the time. The exemption is granted in one of the following cases: Sale of a single apartment once in four years, even if the seller owns several apartments, or sale of an apartment that is the sole apartment of the seller, even if the seller sold more than one apartment in the past four years. This exemption can be utilized once every year and a half (18 months).
The exemption also applies to a single family group that sells two small apartments in order to purchase one larger apartment, up to the selling price limit established by law.