Real estate taxation in Israel: betterment, purchase tax and levies

The process of buying or selling a property is a financial transaction that involves considerable expense. For the average person, these transactions are often of paramount importance in their financial affairs.

The process of a real estate transaction involves taking into account various taxation factors that have the potential to significantly affect the outcome of the deal. In certain cases, a transaction may appear attractive and worthwhile, but the taxation aspect may cause it to lose its strength and become a deal better left unexplored.

To navigate the complex field of real estate taxation, a person must have a solid understanding of the subject and a level of professional expertise. To assist in this effort, we have put together a list of basic taxation components that form an integral part of every real estate transaction.

Betterment tax (mas shevach)

The concept of betterment tax is one that should not be ignored. This tax refers to the likelihood that a product or service will be valued more highly when it is scarce, rather than when it is abundant. It is important to remember that this tax is not a literal tax imposed by the government, but a real one. In order to combat this tax, it is essential to create a sense of scarcity around one’s product or service. This can be done through strategic marketing and positioning, as well as by limiting the supply of the product or service in question. By understanding and implementing strategies to overcome betterment tax, one can increase the perceived value of one’s offerings in the eyes of consumers.

In the field of real estate, there is a tax known as real estate betterment tax. This tax is imposed on the seller at the moment of sale, and it is equal to 25% of the profit made from the transaction. Specifically, this tax applies to the capital gain realised from the sale of any real estate asset, including apartments. The capital gain is determined by calculating the difference between the sale price of the property and the original purchase price, adjusted for inflation and reduced by various expenses incurred, such as legal fees, brokerage fees, purchase tax, renovation costs, mortgage interest, depreciation, and other taxes paid on the property. If the betterment calculation reveals that no capital gain was created, no betterment tax will be paid in the sale transaction, and no exemption will be required.

Who is entitled to an exemption from betterment tax?

Individuals who own a single residential apartment are entitled to receive an exemption from paying betterment tax if they choose to sell their apartment after having held it for at least 18 months. For those selling an apartment purchased before the 2014 legislative reform was enacted, capital gains tax will apply only to the profit accrued since the law was implemented. The calculation will include two distinct periods: the first is the pre-reform exemption period, in which betterment tax will not be imposed on the proportional profit. The second period will be the period in which betterment tax applies, and any profit made during it will be taxed. There are also specific exemptions for TAMA 38 projects and inherited apartments, in which heirs are granted the same exemption rights as the deceased.

Purchase tax (mas rechisha)

Purchase tax is a levy imposed on the sale of goods and services. It is a consumption tax paid by the final consumer or the purchaser of the said goods and services. Purchase tax is applied both to raise revenue for the government and to regulate the consumption of certain products.

When buying an apartment, the buyer is liable for purchase tax. This tax is divided into brackets, and the percentage rate varies according to the type of property and its intended use. The tax rate rises as the value of the transaction increases. The classification of the property determines how it is divided into brackets.

• A single residential apartment.
• Additional apartments beyond the one defined as a single apartment.
• Rights in real estate that is not intended for residence.

In the scenario of purchasing a single residential apartment, the purchase tax will be reasonably low. However, if you already own a residential apartment and intend to invest in a second one, the purchase tax rate will rise. It will start at 8% of the transaction value. In the case of purchasing land, the purchase tax rate will be a fixed 6%, with no cumulative brackets.

Betterment levy (heitel hashbacha)

A betterment levy is a tax applied in certain areas for the improvement of the community. Its purpose is to generate funds to be allocated to various projects, such as infrastructure development, public safety, and preservation of the environment. While some may argue that this tax constitutes an unnecessary burden on taxpayers, others see it as a necessary investment in the future of their community.

When a plan is approved, an easement is granted, or an exceptional use is permitted, causing the value of the land to rise, a tax known as a betterment levy applies to the landowner or the leaseholder. The local planning and building committee is responsible for imposing the levy, which stands at 50% of the increase in value. Payment of the levy is deferred until the betterment is realised, and not immediately upon the design change that generates the betterment. Upon the sale of the property, the receipt of a building permit in accordance with the plan, or the use of the land in accordance with the plan, the property owner may realise their right in the property.

How is the amount of the betterment determined?

The responsibility for determining the value of a property’s betterment rests with the municipality. The following procedure is usually carried out: a representative of the municipality, who is an appraiser, will examine the property’s supplementary area and calculate its value by multiplying it by an estimate of the net cost per square metre, which depends on the property’s location. The value calculated by the appraiser is considered the betterment value, with the actual charge being half of this amount.