Understanding Mas Shevach tax exemptions
Posted on 13. Apr, 2010 by buyitinisrael in Israel Real Estate, Legal Matters
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When selling a house or apartment or any other Israel real estate you may have to pay capital gains tax (known as Mas Shevach) at a rate of around 20 percent. This tax is applied to any capital gain or profits generated as a result of selling a property in Israel. It is important to understand the cost of the tax when considering selling an apartment to buy another.
The tax is also called appreciation tax since the capital gain to be taxed is determined by calculating the difference between the shekel value of the initial purchase of the property and the shekel value of the sale after accounting for the effects of inflation in the interim period. Hence, if no capital gain was made, no tax is payable.
Not every profit made on the sale of a property is taxable. There are cases in which capital gains tax exemptions can be claimed. As a rule of thumb, if you are selling land or commercial property you can not claim an exemption from capital gains tax. However, if you’re selling a residential apartment you may be exempt from paying capital gains tax under certain conditions. The vast majority of sales of residential properties by individuals in Israel are fully exempt from this tax if they meet certain conditions. The main conditions for exemption are as follows:
- If the seller used the apartment for residential purposes and has not sold an apartment during the last four years – in case of ownership of more than one apartment – the capital gain made on the sale of the apartment is not taxable.
- An exemption will also be granted if the apartment being sold is the only apartment owned by the seller and if the apartment was not sold or transferred over the last 18 months.
- If the apartment sold was part of an inheritance, the heirs will be eligible for the exemption in case the deceased had only one apartment and would have been eligible for exemption if alive.
- The sale of two dwellings with a combined value of up to NIS1,298,000 is exempt from the tax once in the taxpayer’s lifetime. The value ceiling is adjusted at the beginning of each year by the rate of increase in the Consumer Price Index. The exemption is awarded on the condition that the person selling the two dwellings has purchased during the year preceding the sale of the second dwelling, or will purchase in the year following said sale, another dwelling that is worth at least 75 percent of the value of both sold dwellings.
As a result of the conditions for the exemption of the capital gains tax on real estate many sellers or investors, in particular in the residential property market, have been able to enjoy vast profits on their investments while families have been able to use the profit to upgrade to a new home. However potential changes to the tax exemption could change this attractive situation.
The Israeli government and in particular the Finance Ministry together with the Israel Tax Authoity and the Housing and Construction Ministry are in the process of examining ways to help cool down real estate prices in Israel, which have been skyrocketing over the past year. One of the suggestions that are being reviewed is the cancellation of the capital gains tax exemption on real estate in particular for investment apartments. At the same time, a tax exemption would only apply to the sale of the first residential property according to the proposal. The Finance Ministry said this week that discussions are at a very early stage and a decision has not been taken on the matter. Proponents of the cancellation argue that the exemption has mainly benefited the wealthy.
Meanwhile, the Association of Builders and Contractors and other experts in the Israel real estate market said they strictly oppose any form of cancellation of the capital gains tax exemptions on real estate arguing that it would not help bring property prices down, but the opposite, and mainly hurt the middle class. On the one hand, property owners are likely to hold on to their apartments and not sell them as quickly as before, which in turn will further increase the problem of a shortage of supply of apartments on the market, while demand continues to rise, and thus prices will continue to go up. On the other hand, the measure will harm young, middle class property owners, who until now were only able to upgrade to a new apartment by using the profit made on the sale of their apartment.
The contents of this article are designed to provide the reader with general information and not to serve as legal or other professional advice for a particular transaction. Readers are advised to obtain advice from qualified professionals prior to entering into any transaction.
© Copyright 2010.
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