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Israel Capital Gains Tax in Real Estate Transactions 

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Are You The Heir To Unclaimed Israeli Property?

In essence, Capital Gains Tax is levied on the profit obtained from the sale of real estate property (apartment/building/office/store/land) in Israel. One could say that the main purpose of Capital Gains Tax is to deter people from engaging in real estate activities for investment purposes. Therefore, there are exemptions from Capital Gains Tax primarily in situations involving private individuals who simply want to change their living situation or provide property to close family members. Still, there are exemptions in other situations as well. Confused? This guide explains in detail what Capital Gains Tax is, how it is calculated, and when and how you may obtain an exemption from it, or at least reduce it.

Table of Contents

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What is Capital Gains Tax?

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Capital Gains Tax is a mandatory payment imposed on a person who sells real estate property owned by him at a profit (capital gain), meaning at a higher amount than the amount he paid when purchasing it, after deducting all the expenses associated with maintenance, renovation, and sale of the property. This profit is called the real profit, meaning the profit minus the expenses (net profit). However, there are several instances where a person can receive an exemption from Capital Gains Tax, thus retaining the real profit from the sale of the property.

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How is Capital Gains Tax calculated?

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In order to calculate Capital Gains Tax, it is first necessary to calculate the real value following the sale of the property, which is the difference between the purchase price and the sale price of the property, after deducting all the expenses incurred. Capital Gains Tax is calculated at 25% of the real profit remaining in the seller’s hands. Of course, when the property is sold without profit, meaning that the real value is negative or equals 0), the seller is not liable for Capital Gains Tax. In addition, when a person is overcharged due to an error in the calculation of the amount of Capital Gains Tax, they are entitled to a financial credit for the excess payment collected.

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When is Capital Gains Tax paid?

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The amount of Capital Gains Tax to be paid is usually calculated at the time of the sale of the real estate, and it must be paid within 60 days from the date of signing the sale agreement. However, there are exceptional cases where payment can be deferred. For example, when a sale agreement of the real estate is signed, but it is agreed that the actual sale will take place at a later date (in a year or other significant period of time later). In such a case, the payment date of Capital Gains Tax can be deferred until the actual transaction is completed.

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Which Properties Qualify for a Capital Gains Tax exemption?

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Exemption from Capital Gains Tax is given only for the sale of apartments that meet the criteria of a “qualifying residential apartment” as defined in the Real Estate Taxation Law (Capital Gains and Purchase Tax) of 1963, more commonly referred to as the Capital Gains Tax Law for Real Estate, which regulates this matter. A qualifying residential apartment is an apartment whose construction has been completed (by definition, an apartment must include a bathroom and a kitchen), is owned by a private individual and not by a company or corporation, and more than half of its area (over 50%) has been used for residential purposes during the 4 years preceding its sale, or during 80% of the time period for which the profit is calculated. Alternatively, an apartment that has not been used for residential purposes in practice but has been used as a kindergarten or synagogue can also be considered a qualifying residential apartment.

How do we know that an apartment “served as a residence” according to the law’s requirement?

In the judgment of HCJ 668/82 Aharon Kors v. Tax Commissioner, (1985), it was determined that the law does not require proof that the apartment actually served as a residence, but rather that the apartment is intended for residential use by its nature. The ruling sets an objective test which requires an examination of the apartment to assess whether it can physically serve as a residence. In other words, the apartment must be examined to determine whether the structure of the apartment is sound, whether it has basic facilities necessary for reasonable residence such as electricity, water systems, a kitchen, a bathroom etc.

Does your apartment meet the definition of a “qualifying residential apartment” according to the law?

Great, we can move on to the next stage! You may request an exemption from Capital Gains Tax for a “qualifying residential apartment”, in the following situations:

  1. The apartment is the sole residence of the seller – A sale of an apartment, which is the sole residence of an individual, and has been owned by them for at least 18 months before the sale, is exempted from Capital Gains Tax. The seller must demonstrate that at the time of sale, no other apartment is registered under the name of their spouse or minor child (due to the “family unit presumption”, certain family members are treated as one legal entity for tax purposes). This is consistent with the legislator’s goal to make it easier for every family unit in Israel to own only one apartment, while at the same time preventing the abuse of the exemption by transferring ownership fictitiously among family members. It is important to note that the exemption for the sale of a sole residence has an exemption ceiling, which is updated annually. As of 2024, the exemption applies up to the amount of 5,008,000 ILS. In other words, the seller of the apartment can only benefit from the exemption up to this amount, and for the remaining amount, they will need to pay full or linear Capital Gains Tax. However, this article focuses on apartments whose value does not exceed this amount (those that are not “luxury apartments”).
  2. The Apartment is being Renovated – Often, an individual who resides in an apartment alone or with their family does not sell their first apartment before purchasing a new one. In practice, a situation may arise where someone who wants to improve their living conditions holds two apartments for a short period of time instead of one. In such an event, the legislator grants a one-time exemption from Capital Gains Tax under certain conditions to a person who sells a qualifying residential apartment while simultaneously owning another apartment. Alternatively, a person may wish to improve their living conditions but intends to sell both apartments and purchase a single apartment in their place. In such an event, the legislator also grants an exemption from Capital Gains Tax under certain conditions for the sale of both apartments, but this is an exemption that a person can receive only once in their lifetime.
  3. The Apartment was inherited – The sale of a residential apartment acquired through inheritance can be exempt from Capital Gains Tax, even when the seller owns other apartments. The utilization of this exemption does not affect the ability to claim other exemptions for other apartments. However, the utilization of this exemption is subject to the fulfillment of all the following conditions:
  • The seller who inherited the apartment is a spouse, descendant, or descendant of the spouse of the deceased.
  • When the deceased was alive, they owned only one residential apartment. In the ruling of Tel Aviv District Court (Administrative), 251/99 Estate Administration Director Dror Weissglas, deceased v. Tel Aviv District Tax Commissioner (2001), it was determined that the exemption will not be granted if the deceased, when alive, owned even a small part of another residential apartment.
  • The deceased was entitled to an exemption from Capital Gains Tax for the sale of a single apartment while still alive.

Note! An heir who is a foreign resident will not automatically benefit from the inherited apartment exemption. According to Tax Decision 7701/21, the use of the exemption under section 49(b) of the Capital Gains Tax Law for Real Estate will be granted to a seller who is a foreign resident heir only when they do not own another apartment in their state of residence.

4. The Rights in Real Estate are Transferred as a Gift – An individual who gives a family member an apartment or another right in real estate as a gift enjoys an exemption from paying Capital Gains Tax. The transfer of an apartment or another right in real estate as a gift is also called a sale without consideration.

5. The Apartment was received as a Gift – Generally, an individual who receives an apartment as a gift from a family member is supposed to pay full Capital Gains Tax on the increase in the apartment’s value during the period they held it, and also on the increase in the apartment’s value that occurred before they owned it. In other words, the gift giver does not actually receive an exemption from Capital Gains Tax but rather passes the tax burden to the gift recipient.

Nevertheless, the sale of an apartment received as a gift may be exempted from Capital Gains Tax under the following conditions:

5.1 The apartment was received as a gift from a spouse, parent, grandparent, grandchild, descendant of the spouse, or the spouse of any of these individuals. Alternatively, regarding an apartment received as a gift or inheritance from parents or grandparents – also when the apartment was received from a sibling, sister-in-law, or their partners.

5.2 Vacancy period – A period of at least 3 years has elapsed from the day the recipient began to receive the gift of living in the apartment, or if he did not reside in the apartment, then at least 4 years have elapsed from the day he became the owner of the apartment. It should be noted that if the recipient is still a minor, the vacancy period begins to count only when he reaches the age of 18.

  1. The Apartment is Renovated under National Outline Plan (TAMA) 38 – TAMA is a national outline plan, and a TAMA 38 project is a plan to reinforce buildings against earthquakes, within which contractors receive building rights in exchange for carrying out works. Apartment owners are required to pay Capital Gains Tax on the increase in value resulting from the renovation. Sometimes, under certain conditions, apartment owners may be entitled to an exemption despite the existence of a TAMA 38 project in their building.
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Can a Foreign Resident Receive an Exemption from Capital Gains Tax?

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The answer to whether foreign residents can be exempt from paying Capital Gains Tax is legally simple but practically complex. In principle, the law stipulates that foreign residents can receive an exemption from Capital Gains Tax when selling their sole apartment in Israel, as long as they obtain approval from the tax authorities in their country of residence demonstrating that they do not own another apartment. In practice, in the vast majority of countries, such a document cannot be produced, and when foreign residents wish to receive an exemption, they must provide external evidence to convince the Tax Authorities that they do not own another residential property.

Regarding the sale of a sole apartment received by inheritance, the law makes a clear distinction between Israeli and foreign residents. As mentioned above, the sale of an apartment received by inheritance is exempt from Capital Gains Tax. However, a foreign resident, unlike an Israeli resident, is not automatically entitled to an exemption from Capital Gains Tax for the sale of an inherited apartment even if the deceased was an Israeli resident throughout his life and at the time of his death. Foreign residents still have to prove that they do not own another residential property in their country of residence. In contrast, when the deceased is a foreign resident at the time of death, the heir (whether an Israeli resident or not) must provide evidence demonstrating that at the time of death, the deceased did not own another residential property in his country of residence, in order to benefit from an exemption.

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The Process for Obtaining a Capital Gains Tax Exemption

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First, the eligibility for a Capital Gains Tax exemption must be examined. That is, it must be determined that the property in question is a qualifying residential property, and that all conditions are met for a specific exemption. Then, a request for the Capital Gains Tax exemption to which the person is entitled must be submitted.

NOTE – when two types of exemptions exist in parallel, a decision must be made through long-term planning and strategic thinking as to which of the exemptions is preferable to exploit. For example, if there is an option to exploit either a one-time exemption for life or an exemption that is not limited to the number of times it can be used during a person’s lifetime, it is preferable, of course, to exploit the second exemption and keep the one-time exemption for a possible future situation in which other exemptions cannot be exploited.

The request for the use of an exemption must be submitted as part of the declaration of the sale of the property right, usually by the attorney representing the seller or the buyer of the apartment, or by the seller, when there is no attorney involved. The declaration and the self-assessment must be submitted to the Land Tax Authority within 30 days from the date of the sale, according to the chosen exemption route. The declaration of the sale of the qualifying residential property and the request for exemption must be submitted by filling in th relevant details in the declaration form, accompanied by all the documents that must be attached to the declaration and the request for exemption.

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How can capital Gains Tax payments be reduced?

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Have you discovered that you are not entitled to any of the exemptions listed above? Don’t give up hope yet. There are several ways to reduce the amount of Capital Gains Tax you owe, and here are the main methods:

Spreading Capital Gains Tax Payments

A person who is liable to pay Capital Gains Tax may submit a request to the tax authorities in Israel for spreading Capital Gains Tax payments over a period of up to 4 years. In practice, this may lead to a reduction of the total amount of Capital Gains Tax to be paid each year. When spreading Capital Gains Tax payments, the real profit increment of each year is added to the taxable income of that year, allowing taxpayers who did not make full use of the lower tax brackets, to reduce the total liability for Capital Gains Tax. The right to spread Capital Gains Tax payments is granted to Israeli residents who have submitted annual income reports to the tax authorities, for the years for which they request spreading payments. The request for spreading payments must be submitted on a dedicated form along with the required documents.

Splitting Capital Gains Tax payments

According to the ruling in 6/97 Nir Yosef v. Tax Assessor Netanya (1998), profits obtained from the sale of real estate property are not considered taxable income. As a result, married couples who hold property jointly are entitled to split the amount of capital Gains Tax payment between them, according to their individual income tax bracket. The split allows for the exploitation of a lower tax bracket of one spouse, and for the utilization of unused tax credits for each spouse, and may save a lot of money for the family unit. The split applies to couples where the property is registered in both their names or when it is registered in one of their names, but there exists a presumption of asset sharing, that applies to couples who married before the enactment of the Financial Relations Law between Spouses (1973).

Expenses and deductions

Taxpayers are entitled to deduct from the amount of Capital Gains Tax any expenses incurred for the purpose of improving the property. Of course, this does not include routine maintenance expenses that do not enhance the property but maintain its current condition. However, receipts can still be attached for many types of expenses, some of which may not be intuitive but are indeed considered expenses for the improvement of the property.

Here are just a few:

  • Building expenses for renovations and improvements to the property or its surroundings.
  • Payment of attorney fees for purchase and sale of the property.
  • Payment of real estate appraiser and certified surveyor fees.
  • Payment of brokerage fees for purchase and sale of the property (up to a certain amount).
  • Fees paid by the seller for the acquisition of the property.
  • Real interest expenses on a loan taken by the seller for the purchase or improvement of the property, such as a mortgage.

These expenses and many others may be deducted, thus reducing the final amount of tax to be paid. When it comes to a property given as a gift or inheritance, the expenses of the gift giver or the deceased may also be deducted from the amount of the Capital Gains Tax.

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Why is it important to consult with a real estate attorney specializing in Capital Gains Taxation?

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The entitlement to exemption from Capital Gains Tax is not always clear, and the examination of the case by an attorney specializing in this field may help determine eligibility for exemption or, at the very least, may lead to a reduction of the amount of tax to be paid. Pre-planning is critical and can save hundreds of thousands of shekels in a single transaction, and in cases of multiple exemptions, can save hundreds of thousands of shekels over several transactions.

The A.S. Law Firm specializes in real estate transactions as well as in planning for the reduction of purchase and sale taxes, including Capital Gains Tax. Our services include the identification of eligibility for exemption or tax reduction, the establishment of a structured tax planning program, and the implementation of this plan in practice. Planning and executing procedural processes with the tax authorities are not simple tasks, and errors in the process may cost a lot of money, time, and energy. Do not go through this alone, let our expert lawyers assist you. Contact us for more information.

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Questions and Answers

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The payment of Capital Gains Tax is imposed on the seller of real estate at a profit (Capital Gains), i.e., at a price higher than the purchase price. However, there are exceptional cases where the seller will be exempt from paying the tax. For example, when an apartment is given as a gift (sale without consideration). In such a case, the tax on Capital Gains from the period in which the real estate was owned by the seller will be paid by the recipient of the apartment when he sells the apartment.

It is important to note that Capital Gains Tax is usually imposed on the seller, but it is a negotiable matter. The parties involved in the sale can always agree otherwise. There are cases where the buyer assumes all sale-related expenses including the Capital Gains Tax, Betterment imposition, and more. Such a transaction is commonly referred to as a “Net Deal.”

The Capital Gains Tax must normally be paid within 60 days from the date of signing the sale agreement of the real estate, but sometimes an extension of the payment deadline can be obtained. For example, when a sale agreement is signed but the actual sale (transfer of payment and ownership of the property) is expected to take place only after a significant period of time. In this case, the payment deadline for the Capital Gains Tax can be deferred until the actual sale occurs.

In order to be eligible for an exemption from Capital Gains Tax, two cumulative conditions must be met, as detailed in this article. The first condition is that the apartment meets the definition of a “qualifying residential apartment” under the Real Estate Taxation Law (Capital Gains and Acquisition). The second condition is that one of the exemptions applies to the apartment, such as exemption from Capital Gains Tax on the sale of a single apartment, exemption for residential improvements, exemption for an apartment given as an inheritance or gift, etc.

Yes. The payment of Capital Gains Tax can be reduced in several ways, including spreading the Capital Gains Tax payments over a period of up to 4 years (in order to benefit from lower tax brackets and thus pay less tax cumulatively), splitting the Capital Gains Tax between spouses (in order to benefit from lower tax brackets and also utilize unused credits of both spouses), and deducting as many expenses as possible incurred by the owner of the property for the purpose of property improvement, and more.

The calculation of the Capital Gains Tax is as follows: 25% of the real profit, meaning the net profit from the sale of the apartment after deducting allowable expenses. Top of Form

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Disclaimer 

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All of the above does not constitute legal advice or a substitute for legal advice, and all information contained on the site serves as general information only. The aforesaid does not replace information provided by an attorney, and the reader should contact and consult with an attorney who specializes in the field before taking any legal action. Anyone who relies on the above in any way does so at his own risk, and the responsibility for any direct or indirect result due to reliance on the aforesaid will apply to the user only.

To Find Out More, Contact us:

office@asinheritancelaw.com

+ 178 62337694 (New York)

+972 48331212 (Israel)

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