Ehud Barak should knock his 5 new apartments into 1

Dror Marmor

If Barak consolidates his five Tel Aviv homes, he could save NIS 215,000 in taxes.

First of all, Ehud Barak must not be allowed to consolidate the five apartments on the same floor he bought in the heart of Tel Aviv into a single huge apartment. It is unacceptable that we will be sold countless tales about the planning of small, inexpensive apartments in Tel Aviv and other cities and then a millionaire comes along to break down the walls.

Just like it is illegal to subdivide an apartment in Tel Aviv's Akirov Tower (or anywhere else) into five small apartments, because of the resulting load on the building and its infrastructures and because there was a gerat deal of thought behind the original plan, the same should hold for the consolidation of apartments. Just as it is hard - almost impossible - to retroactively obtain a permit from a planning and building commission to subdivide an apartment, the planning commissions should reject every request to consolidate apartments after the work was done without a permit.

This should be the case despite the obvious profit to the municipality from the higher arnona (local property tax) - the maximum arnona in Tel Aviv is for apartments larger than 140 square meters - and the need to service fewer residents. The public interest, which requires the construction of more inexpensive apartments in cities like Tel Aviv should trump the short-term municipal calculations.

In the end, we will discover that the promises to build an inventory of small apartments was nothing more than a tax scam by the top 1%. Ehud Barak will pay NIS 139,000 for each apartment bought for NIS 2.5 million, and he will pay NIS 694,000 for all five apartments.

But for a single apartment costing NIS 12.5 million, the government not long ago decided to boost the tax bracket to 8% - resulting in a tax payment of NIS 909,000. In other words, if Barak retroactively consolidates the five apartments into one unit, he could enjoy a tax savings of NIS 215,000. What a great trick.

If Barak keeps the five apartments and rents them out, the Tax Authority will consider him as a real estate businessman for all intents and purposes. He is not the landlord of a simple apartment, who is eligible for a reduced tax rate of 10% on the rental income in excess of NIS 4,980 a month, but he will be a businessman who is bound by the income tax rate of every person. This is especially true of a man with income from rent (five apartments in Tel Aviv will generate NIS 30,000 in month rental income), as well as a respectable pension from the state as a former IDF chief of staff and prime minister, and handsome income from his new jobs as a strategic consultant to the CEO of Swiss private bank Julius Baer Group and other others.

A very senior Tax Authority official recently told me that owning and leasing five or ten apartments should be defined as a "real estate business". But in practice, the Tax Authority does not really know how many apartments each person owns, or how many of them are leased and for how much. A few months ago, "Globes" revealed that the Tax Authority had established an analysts unit to finally sort out the anarchy, find the people owning multiple apartments, and tax them accordingly.

It is important to understand fair taxes on dividends, rental income, and a monthly salary will help the government cool the ardor of investors who cannot find a decent alternative to buying apartments and continue to fuel the monthly rise in home prices.

NIS 30,000 a month on an investment of NIS 13.2 million (the price of the apartments, plus the purchase tax, and before linkage to the CPI, and other costs that will further boost the purchase price), will give Barak a 2.7% gross return. A proper income tax rate should more than halve this return. A worthwhile deal? Not necessarily.

This is especially true because in contrast to the sale of a house in Kfar Shmaryahu or an apartment in the Akirov Towers, there is no tax exemption plan on the capital gains accumulated over the years the apartment is owned. From 2014, the 25% capital gains tax will apply on the difference between the purchase price and the sale price on every sale of a second home. There will be no gimmicks on the exemption on one sale every four years.

If Barak leases the apartments at a return of 1-2%, maybe we will finally believe that the kibbutznik from Mishmar Hasharon still has some social ethics.

Published by Globes [online], Israel business news - - on February 11, 2014

© Copyright of Globes Publisher Itonut (1983) Ltd. 2014

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