A General Guide to Taxation on Property

There are various types of taxation applicable to Real Estate acquired, held and sold in Israel. Property may be subject to some or all of the following taxes:

1. Purchase Tax (Mas Rechisha) upon acquisition
2. Capital Gains Tax (Mas Shevach) and Sales Tax (Mas Mechira) when sold
3. Municipality taxes (Arnona).
4. Income Tax (Mas Hachnassa) when it generates rental income.

Purchase Tax:

Purchase Tax is levied on the purchaser of Real Estate. The below deals with the Purchase Tax payable in respect of a "residential dwelling" which is defined as a dwelling that has the attributes of a residence (i.e. kitchen, bathroom) and whose construction is completed. A building under construction will be considered a residential dwelling if the selling constructor undertakes, in the sales an agreement, to complete construction.

The Purchase Tax in respect of residential dwellings is an incremental tax.

In order to calculate the tax, the total purchase price of the dwelling is divided into three brackets and a different rate of tax is applied to each bracket, as follows:

Bracket 1 is subject to tax at the rate of 0%

Bracket 2 is subject to tax at the rate of 3.5%

Bracket 3 is subject to tax at the rate of 5.0%

 

The range of each bracket is adjusted every 3 months in sheqel terms in accord with changes to the Israeli Price Index and at present is closely equivalent to the following:

Bracket 1 (0%) – First 925,000 nis

Bracket 2 (3.5%) – Between 925.000 nis to 1.300.000 nis

Bracket 3 (5.0%) – 1.300.000 nis

 

A New Immigrant (Oleh) or a Temporary Resident holding a B-1 visa, pays a reduced rate of Purchase Tax on residential property purchased within five years of Immigration (Aliya).

In the event that the Immigrant wishes to purchase the residence prior to making Aliyah, the reduced rate will also apply if the purchase is made within one year prior to the date of Immigration. In this case, the tax must be paid in full and the excess will be refunded with proof of Aliyah.

 

Capital Gains Tax:

A person selling a building (or part of a building) must pay Colony Gains Tax (also referred to as Land Appreciation Tax) at the regular rates of Income Tax on the difference between the purchase price for which the building was purchased and the consideration received in connection with its sale.

Exemptions from Colony Gains Tax are available in connection with the sale of a residential dwelling. For purposes of the exemption, real property is considered to be a residential dwelling if it meets all of the following criteria:

Construction of the dwelling has been completed.

The dwelling is owned by an individual and not by a company.

The dwelling actually serves as a residential dwelling or contains all the attributes of a residential dwelling (i.e. kitchen, bathroom etc.).

The dwelling does not constitute the business inventory of seller- i.e., the seller is not in the business of selling real property.

Exemption from Colony Gains Tax in connection with the sale of a residential dwelling is available in the following circumstances:

The owner of residential dwelling who has not owned more than one residential dwelling at any time during the four years preceding the sale of the dwelling is entitled to an exemption from Colony Gains Tax.

An exemption has not been granted in the previous one and a half years.

A person who purchases a second, replacement residential dwelling within nine months prior to the sale of his residential dwelling is still deemed as owning only one residential dwelling and is entitled to the exemption. It should be noted that this exemption is available only with respect to the sale of at least a fifty percent in the subject dwelling.

Every person is entitled to an exemption from Colony Gains Tax in respect of the sale of one residential dwelling once in every four years, regardless of the number of dwellings owned by such a person.

Special rules apply to dwellings received as gifts or as part of an inheritance or testamentary bequest.

It is important to note that to be entitled to any of the foregoing exemptions the seller must sell all of his interest in the dwelling without retaining any ownership interest therein.

Sales tax:

The sales tax, levied on the seller, applies to commercial property and plots and to residential property sold by developers/ builders or by companies. There is no tax on residential property sold by private individuals. The tax rate is 2.5% of the sales price. In certain cases, such as the sale of the property by developers/ builders, the rate is reduced to 0.8%.

Property Tax:

Property Tax which was levied on undeveloped plots not utilised for either residential, commercial, industrial or agricultural purposes has been cancelled. The sales tax was instituted in its place.

Municipality Tax:

Arnona, or Municipality Tax is generally levied on buildings by the municipality or local authority in which the property is located. Rates of Arnona vary between different neighbourhoods in the municipality or local authority area. Rates are calculated in according to the size of the property. Reductions are given for senior citizens, handicapped people and new immigrants.

Municipality rates (N.I.S. per sqm) on residents in Jerusalem are calculated as follows:

YEAR 2008

Type of Property Area:	1	2	3	4
A	88	73	46.29	28.36
B	72.16	52.78	34.42	28.36
C	55.66	39.27	28.36	28.36
D	45.51	28.36	28.36	28.36

 

Type of Property "1" Dwelling more than 120 sq. m.

Type of Property "2" Dwelling less than 120 sq. m.

Type of Property "3" outside or joint W.C.

Type of Property "4" Basement or sub-standard

The municipality used the net squares for its calculations. Net square meters are calculated without interior or exterior walls. Included are covered balconies over 6 sq. m., 20% of the area of penthouse balconies and 50% of storerooms. Gardens and parking areas are not included. The properties offered by Welcome Home Realty are all in area "A".

The information contained on this page is a general guide. Prospective purchasers must obtain specific legal and professional advice from qualified Israeli legal counsel or tax advisors.