As part of his efforts to combat the rise in housing prices, Minister of Finance Avigdor Liberman has announced plans to hike purchase tax to 12.5% on investors who buy four or more apartments, regardless of the price of the apartment. Investors who own more than one home currently pay purchase tax of between 8% and 10%, depending on the value of the apartment.
Will this affect the market? According to real estate taxation expert Adv. Shay Einat, a lawyer and an accountant, the difference between the current purchase tax brackets and Liberman's new plan is significant. "To date, regarding an apartment for investment, the purchase tax rate is 8% on amounts of up to NIS 5,525,070 and above that, the rate rises to 10%. According to the proposal, the rate would rise to 12.5%, regardless of the price of the apartment."
"We are talking about luxury apartments being hundreds of thousands of shekels more expensive. But investors prefer to invest in relatively cheap apartments, which bring higher returns. The current hike in these apartments is a relatively meager amount of NIS 100,000, which is worth two years rent."
So this tool is only effective in the luxury housing market?
"The difference rises as the price of the apartment rises. So for apartments for investment in the NIS 1 million - NIS 2 million price range, the effect is questionable. When we are talking about small apartments in the periphery, the difference is not large between the existing tax and the planned tax, and then the question of its effectiveness is raised."
Thus Einat gives the example of a two room apartment in Kiryat Ata that costs NIS 870,000. "According to the existing tax rate for two or more apartments, 8% tax of NIS 69,600 must be paid. If it would be the fourth apartment, according to the planned tax of 12.5%, then NIS 108,750 would be paid - in other words a difference of roughly NIS 38,000. That is not a difference that would cause somebody not to buy the apartment."
Another example would be a two room apartment in Beersheva, worth NIS 730,000. "According to the existing purchase tax, NIS 58,400 tax would be paid but with Liberman's fourth apartment planned legislation, this would become NIS 91,250 tax. A different of about NIS 30,000. Again this is not a difference that would deter an investor. What the investor would do is press the seller to lower the price a bit."
Moving to the center of the country and buying a 2-3 room apartment in Tel Aviv, Givatayim and environs sees the tax on investors become relatively more effective. So buying a two-room apartment in Givatayim for NIS 2.4 million would mean purchase tax rising under Liberman's plan from NIS 199,000 to NIS 300,000.
For a two-room apartment in Jaffa that is bought for NIS 2.1 million, NIS 168 million purchase tax would currently be paid on as fourth apartment but according to Liberman's plan this would rise to NIS 262,500. On an eight-room penthouse in Netanya costing NIS 8.5 million, the NIS 740,000 currently paid would rise to NIS 1 million.
Real estate tax expert Adv. Meir Mizrahi describes the planned tax on fourth apartments as a fine. "Purchase tax is an indirect tax," he said. "In other words it is imposed on the actual purchase and not on the profit like betterment tax. It is imposed on the consumption. On the money that buys the apartment taxes many taxes have already been paid like income tax, National Insurance, VAT and more. Now that you want to make use of money on which you have already paid taxes, they collect another tax of a disproportionate amount."
Adv. Mizrahi estimates that any damage that will be caused to the real estate market from the Liberman plan will be more than the benefit. "This tax won't benefit young couples that have a problem because investors will transfer their investments from expensive apartments to cheaper apartments, from apartments costing NIS 3-5 million to apartments costing NIS 2 - 2.5 million. It will cause more damage to the market because young couple needs exactly these apartments."
Adv. Mizrahi adds that the use by the government of purchase tax to cool off the real estate market is fundamentally wrong. "The frequent use of the tax as a tool to influence the real estate market causes damage and will cause more damage. It will also increase the motivation of both the seller and the buyer to file incorrect reports to the Tax Authority because the fine is very high and it will increase friction with the state.
"In order to correct the situation you should give carrots, like an exemption or tax relief on Betterment Tax on the sale of land, relief on selling apartments and relief on the Law for the Encouragement of Capital Investments in order to let people rent out apartments. Tax policy of just punishments without relief, and just increasing purchase tax won't be of any benefit."
Published by Globes, Israel business news - en.globes.co.il - on March 24, 2022.
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