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Improvement Levy in Real Estate Transactions

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Are You The Heir To Unclaimed Israeli Property?

When selling real estate property, the owner can benefit from the profit gained from the sale, but they must also pay the required taxes to the state. One of these taxes is called an improvement levy. The purpose of this levy is to return funds to the local planning and building committee for investments made in developing the property or the nearby area, which led to an increase in the property’s value.

Want to know who has to pay the improvement levy, when it should be paid, and who is eligible for an exemption? We have compiled all the information you need to know on this topic in this article. Keep reading.

Table of Contents

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What is an Improvement Levy?

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The improvement levy is a payment collected by the local authority from property owners or long-term leaseholders within its jurisdiction, following actions that led to an increase in their real estate value. It is important to note that according to the ruling of the Central District Court – Lod (Administrative Appeal 44789-11-13) “Local Planning and Building Committee of Petah Tikva vs. Golden Point Ltd.” the improvement levy can only be charged for improvement directly resulting from the municipal plan, not for improvement resulting from business activities unrelated to the plan.

The improvement levy is charged only after the local planning and building committee grants one of the following three approvals, which increase the value (improvement) of a property within its jurisdiction:

  • Approval of a new Urban Building Plan (UBP): The UBP can be a detailed plan or a master plan that grants legal rights for additional use or construction on the property or changes its current designation (e.g., from agricultural land to residential land). The obligation to pay the improvement levy may apply not only to property owners directly affected by the UBP but also to adjacent property owners, provided the local authority can prove that their property also benefited from the plan. For example, the construction of a mall near a residential area.
  • Approval of a relief: A legal document approved by the local planning and building committee at the request of the permit applicant, allowing minor deviations from the conditions specified in the original UBP. For example, to allow the addition of an elevator or a balcony. Relief approvals are typically granted when construction according to the original UBP would create absurd situations leading to non-ideal construction and less suitable residential buildings, and sometimes when the local committee wants to retroactively approve structures already built not according to the original UBP (instead of ordering their demolition).
  • Approval of an exceptional use: A permit for exceptional use allows a property to be used differently from the original use as defined by the building permit. For example, converting an industrial building into a cultural center.
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Who is Obligated to Pay the Improvement Levy?

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Section 2 of the Third Addendum to the Planning and Building Law of 1965 states that the owner or long-term leaseholder (leasing the property for more than 25 years, usually from the state) of a real estate property must pay the improvement levy for that property. Therefore, the relevant local committee can only charge the levy to that owner or long-term leaseholder. However, sometimes the parties to a property sale agreement agree that the buyer will pay the improvement levy for approval granted after the contract is signed, rather than the seller. This agreement is entirely legal as long as it complies with the rules of Contract Law.

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When is the Improvement Levy Paid? (Timing of Payment)

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Although the improvement levy is calculated when the approval leading to the property’s improvement is granted, it is usually paid later, at the time of the property’s sale. This contrasts with other real estate taxes like capital gains tax. The reason is that, in principle, the actual sale price of the property should reflect its improvement and be higher than it would have been without the approval of the plan, relief, or exceptional use that increased its value.

If the approval is for relief, the ruling of the Tel Aviv Administrative Court (52532-09-12) “Local Planning and Building Committee of Herzliya vs. Lerer” states that the relevant date from which the improvement due to the relief is calculated is the date of the relief approval, not the date of the original plan, which subsequently led to the committee’s decision to approve the relief.

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In What Cases Is There an Exemption from the Improvement Levy?

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There are several cases where eligibility for an exemption from the improvement levy may exist, including: land located in a rehabilitation neighborhood as defined by the government, or in a rehabilitation area under the Urban Renewal (Rehabilitation Areas) Law; land or apartments held by their owners for 10 years or more before the improvement; land or apartments whose owners are eligible for assistance under the Ministry of Construction and Housing’s program for adapting housing conditions for people with mobility disabilities; improvements in building a Residential Protected Space in an apartment under certain conditions; construction or expansion of a residential apartment up to 140 square meters, and many other cases.

Additionally, the local planning and building committee has the authority to exercise discretion and grant a full or partial exemption from the improvement levy due to the approval of a relief or a non-conforming use given the condition of the property. It is important to know that an exemption from the improvement levy is sometimes granted automatically, but in most cases, it can only be granted if an application is submitted to the local planning and building committee for the exemption within 45 days of receiving the assessment of the property’s value (except in special circumstances justifying a different deadline). The application must be submitted with the relevant required documents for each specific case.

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Improvement Levy Rate

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Assuming no full or partial exemption from the improvement levy is granted, the levy amount will be 50% of the increase in the property’s value, meaning exactly half of the improvement value (not the property’s actual value). For example, if the property’s value before the improvement is 1,000,000 NIS, and it is determined that the improvement increased the property’s value by 200,000 NIS, the improvement levy will be 100,000 NIS (exactly half of the improvement amount).

The good news – for the benefit of property owners who have improved their properties, is that it is possible to deduct from the improvement amount the expenses paid for the realization of the building rights, such as construction or renovation costs, material costs, etc. For example, continuing from the same example – if the cost of materials and renovations amounted to 50,000 NIS in total, the improvement value would be 200,000 NIS (-) 50,000 NIS = 150,000 NIS, and the final improvement levy would be exactly half of that – 75,000 NIS.

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Can an Appeal Be Submitted Against the Improvement Levy Payment Demand?

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If you receive a demand for an improvement levy payment for a property you own and you believe you are entitled to an exemption or that the amount charged is excessive, you can appeal it. To appeal the charge itself, you must submit the appeal to the relevant District Appeals Committee. To appeal the amount charged, you must submit a request for the appointment of a decisive appraiser (the authorized entity to hear the appeal) to the Chairperson of the Real Estate Appraisers Council. The appeal or request for the appointment of a decisive appraiser must be submitted within 45 days of receiving the assessment from the local committee.

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Why Is It Important to Consult with a Real Estate Attorney Before Paying the Improvement Levy?

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Improvement levies that property owners are asked to pay can reach significant amounts, and a professional review by a real estate attorney often reveals that there is eligibility for a full or partial exemption that may apply in their case. The list of exemptions is long, and understanding whether the circumstances of the case establish eligibility requires expertise and knowledge of the legal subject matter, including familiarity with court rulings in similar cases. Additionally, when submitting the application, it is necessary to attach complex documents such as real estate appraisals, plans, sales contracts, and other relevant legal documents. Unfamiliarity with the required types of documents in each case and the difficulty of collecting them can be an obstacle to obtaining the exemption.

When contacting our firm, A.S Law, you have a team of experienced real estate attorneys at your disposal, specializing in the intricacies of improvement levies, including the collection and organization of all relevant documents, dealings with appraisers, local planning and building committees, appeals committees, and representation in various courts. We are happy to assist you in reducing or canceling the improvement levy imposed on your property, starting from checking eligibility all the way through to obtaining an exemption. Contact us for more details.

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Questions and Answers

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A real estate attorney specializing in improvement levies can help you determine if you are eligible for an exemption from the improvement levy for the sale of your property based on the circumstances of your case. In most situations, the exemption is not granted automatically but only after submitting an application to the local planning and building committee within 45 days of receiving an assessment, along with the relevant documents. If there are special circumstances justifying a different deadline, an extension may be granted.

There is a closed list of cases for which an exemption may be granted. Some of the more common cases include: improvement by building a Residential Protected Space in an apartment that satisfies the minimum required size, construction or expansion of a residential apartment up to 140 square meters, and lands located in a rehabilitation neighborhood or area. Additionally, the local planning and building committee can grant a full or partial exemption from the improvement levy if, due to the condition of the property, a relief or non-conforming use is approved.

The improvement levy is calculated at the time the approval leading to the property’s improvement is given, but is imposed for payment only at the time of the property’s sale. If the approval given is a relief, the court ruling states that the improvement for the relief is calculated from the date the relief is approved, not from the date the original plan was approved.

Yes, it is indeed possible to reduce the amount of the levy to be paid and sometimes even obtain a full exemption. This can be done by submitting a reduction request to a decisive appraiser after requesting their appointment from the Chairperson of the Real Estate Appraisers Council within 45 days of receiving notice of the levy, along with all the required documents.

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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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