Cabinet approves tax hike on homes for investment

Moshe Kahlon photo: Shlomi Yosef, Shutterstock

The rise in purchase tax to 8-10% is expected to add NIS 600 million to tax revenues.

The cabinet today unanimously approved the most prominent element in the reform as far as the public is concerned: raising the purchase tax on purchases of apartments for investment. Minister of Finance Moshe Kahlon's housing reform will be brought before the housing cabinet for approval in its upcoming session on Monday, sources close to the minister believe.

According to the proposal that was approved, the purchase tax will be raised to 8% on the first NIS 1 million and 10% above that amount for the purchase of an apartment that is not the purchaser's residence. Under the current tax brackets, which are still valid until the end of the month, purchasers of apartments for investment paid 5-7% up to NIS 4.6 million.

Tomorrow, the approved proposal will be brought before the ministerial legislative committee, and the Ministry of Finance plans to bring it for its first Knesset reading this week in order to finish the legislative procedure before the temporary order expires two weeks from now. A memorandum for the proposed bill stated that the temporary order, which went into effect in 2013, will retroactively become a permanent order, while the new tax brackets will be enacted as a temporary order valid until 2020.

At this state, it is unclear how raising the purchase tax will affect the demand for apartments for investment. As reported exclusively in "Globes" last week, an internal probe by the Ministry of Finance budget department estimates that raising the tax to 8% will reduce the number of deals in the apartments for rent market by only 10-15%. According to the same calculation, raising the tax brackets will increase state revenues by NIS 600 million, from NIS 1.8 billion to NIS 2.4 billion.

In recent days, the media reported that the Ministry of Finance had a different opinion by its chief economist, Yoel Naveh, in which demand for apartments would drop by 35%, but this is a misinterpretation of what was written. A perusal of the memorandum for the bill shows that Naveh was asked to check whether raising purchase tax would affect state tax revenues (due to the fall in the number of deals), not whether it would cut demand for apartments for investment. Naveh estimated that state tax revenues would be affected only if the tax hike cut the number of deals in the apartments for investment market by 35% or more.

In practice, the Budget Department expects that raising the tax brackets will increase state revenues by NIS 600 million to NIS 2.4 billion. The same calculation found that in order to maximize revenues from purchase tax, the country should increase the tax to 15%, and that tax revenues will fall only beyond that point.

To take advantage of the momentum

Meanwhile, the Ministry of Finance wants to take advantage of the momentum created to promote a general housing reform. The plan, which requires approval from the housing cabinet, is designed to bolster the supply of housing and to moderate demand among purchasers of a second apartment. Referring to this plan, the Prime Minister said, "We are going to deal with the three elements of production: land, personnel, and capital. If we deal with these three things, we can get results. We want to pass this quickly in the cabinet and in the Knesset. This is definitely a new and daring path, and in my opinion, it will also succeed."

Kahlon's spokesmen today said that the plan to be presented next week is the first stage in the housing plan. This stage includes a large number of measures aimed at solving a series of stumbling blocks and problems typical of the housing market in Israel. The goal is to moderate the price increases in the market and help young couples finding it difficult to buy their first apartment. The reforms for increasing the housing supply include measures for bolstering the supply of housing in municipal areas by encouraging the conversion of office apartments to residential apartments, an expedited track for splitting rental apartments, promotion of construction on publicly zoned land, expanding the definition of local residents in the allocations by the Israel Land Authority (ILA), expanding the buyer fixed price program and the supply of cheap land, increasing the discounts and extending the criteria for the buyer fixed price program for purchasers of a first apartment, and measures for increasing productivity in the construction center through grants and a change in standardization in favor of industrialized construction firms, and increasing the number of workers in the construction sector by training Israelis, and the addition of foreign workers.

Reforms are also planned in land redemption, establishing an urban renewal authority, adopting the conclusions of the ministerial team for examining housing in minority communities, and encouraging construction in rural areas by promoting construction through a correct division between marketing to the next generation and the general population, plus addition incentives in outlying communities. In housing for the haredi (ultra-Orthodox) community, an expansion of the basket of housing solutions the haredi population is planned. This last measure included in a reform for increasing the supply is the formulating of roof agreements and strategic agreements promotion of agreements for removing barriers for large housing lots.

A total of 95,000 housing units are planned in these agreements. As part of the measures for restraining demand for investment in apartments, in addition to the purchase tax hike, other tax measures are planned for increasing the supply of available apartments, including a limitation in the definition of waiting apartments to 12 months, instead of 24 months at present, and restriction of the betterment tax exemption period for a single inherited residential apartment, which will be limited to 24 months from the day the apartment is received.

Published by Globes [online], Israel business news - www.globes-online.com - on June 14, 2015

© Copyright of Globes Publisher Itonut (1983) Ltd. 2015

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Moshe Kahlon photo: Shlomi Yosef, Shutterstock
Moshe Kahlon photo: Shlomi Yosef, Shutterstock
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