The Ministry of Finance recently published the draft of a new law with a range of measures to raise revenue for the war-battered economy, some of which related to real estate, and will have significant ramifications for homebuyers.
The significant measure
The measures relating to real estate in the draft law almost all have one thing in common - freezing linkage to the Consumer Price Index (CPI) between 2025 and 2027.
One of the main clauses is freezing purchase tax brackets when buying an apartment. These brackets will not be revised over the next three years regardless of how much the CPI rises. The brackets determine how much tax the buyer will pay according to the price of the apartment, and the higher the price, the higher the tax rate. Those who currently buy an apartment for up to NIS 1,978,745 do not pay any purchase tax.
As taxation experts explain, the meaning of this change is a higher price for the apartment: if the exemption level is fixed, and housing prices continue to rise - more people will have to pay more tax.
"In the reality we are in, it is clear to all of us that apartment prices are not going to go down, and will even go up," says real estate expert Adv. Vered Olpiner-Sakel CPA. "If you freeze the tax rates, in practice the tax liability increases, and this makes the apartment price more expensive, and leaves people, who are already having trouble buying an apartment, with a higher cost. This hurts every first-time homebuyer, and especially young couples struggling to find equity for the mortgage, affected by every small change in costs."
Real estate tax expert Adv. Meir Mizrahi, owner of the Meir Mizrahi with A. Rafael & Co. law firm says that this is probably the most significant measure in the new draft law. "We are talking about collecting huge sums of money every year. In 2023, almost NIS 8 billion shekels of purchase tax was collected. A three-year freeze is a very long period, during which the index can rise quite a bit, while tax rates will remain as they are."
The concealed measure
One of the clauses that will also raise taxes, especially for owners of more than one apartment, is concealed because it refers to a tax that is not related to real estate: surtax. This is a tax, currently at a 3% rate, imposed on those whose annual taxable income exceeds NIS 721,560 (as of 2024). The draft proposes adding 2% to the surtax, and also sets a change relevant for anyone who owns more than one apartment: the inclusion of the appreciation from additional apartments in the calculation of taxable income. In the words of the draft law - "apply surtax to all income from appreciation, including from the sale of apartments, provided it is not exempt from appreciation tax according to the law." As of today, all apartments with a value of up to NIS 5.382 million are excluded from surtax, and the draft law proposes to secure this exclusion for an additional apartment.
Adv. Efrat Solomon, partner and specialist in real estate taxation at Meir Mizrahi with A. Rafael & Co. law office, explains that this is a significant measure, since it actually adds a new tax, at the rate of 5%, on the seller of an apartment who has more than one apartment. "Surtax has been considered a tax only for the rich, but since the new clause also includes capital gains from the sale of an apartment, it is relevant to a great many people. It is enough for a person to sell an apartment for which the capital gain is NIS 1 million (that is, a difference of NIS 1 million in the real price, between the value of the apartment at purchase and at sale), after paying 25% capital gains tax, will be left with a profit of NIS 750,000, which would be considered for surtax purposes, and would require another 5% tax, or 30% in total - this is a very significant matter."
The great significance can be gleaned from the draft law itself, which estimates that from this clause alone the state is expected to benefit from an additional income of NIS 420 million shekels in 2025, and by about NIS 520 million in 2029.
The unsurprising measure
The draft law also includes a freeze on the tax exemption ceiling of NIS 5,654 per month on income from renting apartments, up to which the landlord does not have to pay tax. This ceiling is also linked to the CPI and is revised annually, and here too the Ministry of Finance is looking to freeze linkage for three years. Thus if rents rise and the ceiling is unchanged, the tax liability will increase. From the point of view of taxation experts, this is not a surprising step.
"For years we have been hearing from the Tax Authority and the Ministry of Finance various statements about the desire to erode this exemption," says Adv. Mizrahi. "This measure has significance and will of course have no small effect on housing rents but in my opinion it is relatively less significant than the other measures mentioned here."
"The Tax Authority has been fighting landlords for years," says Adv. Olpiner-Sakel, "and measures have been taken in this regard, such as the campaign against non-reporting of tax liability by landlords. But we must remember that for many landlords, the apartment is their only pension, and heavy taxation will hurt them a lot."
Today, an exemption from capital gains tax is given to those who sell their only apartment, as long as the sale amount does not exceed NIS 5,008,000. Adv. Solomon points out that this is a significant amount and includes many apartments on the market, some of them luxury homes. Above this amount the 25% tax is very substantial so the exemption affects many people. If the exemption ceiling remains as it is, a situation may again arise where many apartments will not be seen as under this exemption ceiling, although this is a significantly smaller amount compared with freezing of linkage to purchase tax brackets.
"The scale of collection of capital gains tax, compared with purchase tax, is less significant, we are not talking about the same amounts," says Adv. Mizrahi, "which shows that it is of lesser significance in this case. This is a significant tax, but the change is not very dramatic in my eyes."
Will the draft law be enacted?
In a challenging period for the Ministry of Finance, in which officials are striving to find sources of biggest state revenues, some trial balloons have been put into the air, some of which will not enter into law at the end of the process. Does the draft law have a chance of being enacted? "There is a psychological issue here," says Mizrahi, "since most of the clauses in the drat do not explicitly mention raising taxes, but only about freezing linkage, which sounds more 'soft.' Therefore, in my opinion, it has a chance of being enacted."
Olpiner-Sakel says, "Bottom line, these changes in real estate taxation concern a lot of people. It is customary to perceive legislation of this type as harming the rich, but in our case this is not true. The clauses in the draft will not only harm the rich, but perhaps mainly those who today have the most difficulty getting an apartment."
Published by Globes, Israel business news - en.globes.co.il - on October 8, 2024.
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