The biggest real estate tax goldmine that the Ministry of Finance has included in the new austerity measures, a mine which it estimates will generate NIS 1.05 billion in taxes a year, is the new purchase tax bracket, which will come into effect immediately for people moving upmarket.
The new tax of 3.5% will be levied on homebuyers who "previously were registered as owning a different residence." Currently, buyers of a residential apartment ("single apartment") pay no tax at all on a home with a value of up to NIS 1.47 million. Now, the Ministry of Finance intends to collect tens of thousands of shekels from every homebuyer who previously owned a home (NIS 50,000 for the buyer of an apartment worth the current exemption threshold).
Why should Israel's people pay such a high tax for a roof over their heads, which will de facto be their only home? That is not at all clear, but it seems that the Ministry of Finance and Tax Authority deliberately confused us (and the members of the Knesset Finance Committee) with countless declarations about the cancellation of the betterment tax for investors, and with plans to tax buyers of luxury homes and foreign residents, when in practice they were planning to collect most of the new real estate taxes from the classic middle class - Israelis who merely want to buy a new home.
Moreover, while the other items in the law's land tax chapter, which have far less fiscal significance, were provided with detailed explanations in the document published by the Ministry of Finance, the new tax bracket for people moving upmarket is mentioned in the laconic Paragraph 4, and with no detailed explanation.
Now, unless the tax is a trial balloon intended to be the first item removed from the package, we have a new tax category: not only first-time homebuyers versus real estate investors, but also buyers of single homes after already owning a home. It is important to note that this last group accounts for most homebuyers in Israel - tens of thousands of families moving upmarket, selling their home and buying a slightly better one every few years, as well as thousands of Israelis who, to their anguish, not only sold their old home years ago, missing out on at least part of the surge in prices - they will now pay tens of thousands of shekels in additional taxes on the purchase of their new residence.
The betterment tax
At the same time, the Ministry of Finance plans to abolish the conditional exemption from the betterment tax for the sale of one apartment every four years. Beginning in January 2014, buyers of homes for investment (an apartment that is not their only apartment) will pay 25% of the gain created between the purchase and the sale. The tax will be linear, so that the gain accumulated over the years will be divided proportionately on the basis of the period of time that seller will own the apartment from 2014.
The Ministry of Finance says, "Transition provisions will be set for the sale of apartments bought before the proposed amendment comes into effect." This means that there is no assurance that anyone who rushes to sell an apartment in 2013 will avoid the full tax liability. The ministry estimates that the cancellation of the betterment tax exemption will generate NIS 60 million in 2014.
At the same time, sellers of luxury homes, even if it is their sole residence, will no longer be exempt from the betterment tax. The Ministry of Finance plans to cap the exemption on the portion of the proceeds at NIS 5 million. Sellers of a single residence will no longer have to meet the condition of one sale every four years to earn the full exemption from the betterment tax, as the condition will be superseded by a new one owning a home for just 18 months ("In order to prevent the sale of a string of completely new apartments every 18 months.")
Foreign residents
Foreign residents who buy a home will not be eligible for the exemption from the betterment tax or the low purchase tax bracket (unless they immigrate to Israel within two years of buying a single home, in which case they will receive a refund). The Ministry of Finance says, "The purchase tax break is given to ease the housing problem of young couples, Israeli residents, who do not own a home, and not to encourage investment by foreign residents." It adds, "The system of tax breaks is also exploited to buy empty apartments, which raises home prices."
Other real estate taxes
A new purchase tax bracket of 8% has been established for the purchase of a luxury home exceeding NIS 5 million in value (in addition to the betterment tax on a single home exceeding this amount). The exemption on the transfer of assets between relatives tax has been narrowed, so that the transfer of an asset will be considered as a gift only if transferred between spouses, children, parents, and grandparents. The Ministry of Finance says that the current exemption, including transfers between siblings and their spouses "creates a tax planning loophole for transactions that are not transactions without compensation."
Published by Globes [online], Israel business news - www.globes-online.com - on May 8, 2013
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