Buyers can now own two apartments in Israel for 25 months without being considered “investors”

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With the difficulty of selling apartments during Corona-times, a seven-month extension has been granted to Israelis to sell their apartment before being considered “investors” — a definition that carries a tax of up to hundreds of thousands of shekels. Previously, buyers were permitted to own two apartments in Israel for only a year and a half

A significant tax incentive was approved this week by the Knesset, in order to ease the purchasing of apartments by “housing enhancers” –  buyers who purchase one property in place of another. According to the benefit that was approved in response to the economic crisis and the reduction in the number of transactions as a result of the Corona pandemic, a buyer is able to hold two apartments for up to a period of two years and one month without being considered a real estate investor.  As a real estate investor, he would be obligated to pay significantly higher real estate taxes.

According to the existing law, a purchaser is entitled to own two apartments in Israel, both his previous apartment and his new apartment, for a period of up to a year and a half, without being considered a real estate investor. According to the law, a year and a half is a period that should be sufficient for the homeowner to sell his previous apartment, assuming he is indeed interested in selling it.

Number of transactions has dropped in Israeli housing market

However, with the outbreak of the Corona crisis, the number of transactions in the Israeli housing market has dropped to the lowest point since figures were first recorded, around 20 years ago. During April 2020, when the majority of Israelis were in lockdown in their homes, only 2,100 deals were closed in the whole country, an amount that was less than 80% of the recorded transactions in April of 2019.

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This week, the Ministry of Finance decided that, due to the difficulty in selling apartments at this time, the seven month period between March 1st, 2020, and October 1st, 2020, will not be counted toward the 18 months when buyers have to sell their old apartments before they are considered investors. Accordingly, housing enhancers are now permitted to hold two apartments for 25 months, namely, two years and one month.

However, if a person purchased a second apartment during this period, he will be able to benefit only from the date on which he purchased. For example, if he purchased a second apartment on 1.7.2020, he will be able to benefit from only three months out of the seven-month extension, namely between July 1st until October 1st, and must therefore sell his first property within 21 months, by 1.4.2022, in order to receive the tax exemptions.  That is unless a further extension is determined in the future.

An important distinction between “investor” and “enhancer”

The distinction between a “real estate investor” and a “housing enhancer” is extremely important for tax purposes and can translate into taxes in the region of hundreds of thousands of shekels. When an Israeli resident purchases a single apartment, he is exempt from paying purchase tax on the first 1.74 million shekels, is entitled to a reduced tax rate of 3.5% up to 2.07 million shekels, and pays 5% on the remaining amount above the ceiling. As a “real estate investor” on the other hand, he would be obligated to pay 8% tax on the total purchase amount.

Thus, for the purchase of an apartment of say 2.5 million shekels, the buyer of a single apartment will pay almost 33,000 shekels in Purchase Tax (Mas Rechisha), compared to 200,000 shekels that he would pay on the same apartment as an investor.

In addition, upon the sale of an apartment,  the real estate investor is charged with a 25% Capital Gains Tax (Mas Shevach), based on the increased value of the property from the day he purchased it until the day of the sale. Since real estate prices in Israel have seen a sharp incline in the past 15 years, this is a considerable amount. In contrast, the owner of a single apartment enjoys a full exemption from the capital gains tax, provided that he has owned the apartment for at least a year and a half.

Extension does not apply to foreign residents who own two apartments in Israel

It must be mentioned, that for the purpose of real estate transactions in Israel, foreign residents are generally defined as “investors”.  Purchase Tax rates for investors are expected to go down to 5% from January 1st, 2021.

The Knesset’s session approved a second and third reading of the bill for the seven-month extension. This was a government proposal to which a private proposal was made by Knesset members Dr. Shlomo Keri (Likud), Miki Levy (Yesh Atid), and a group of MKS, in providing an extension of tax exemptions to housing enhancers who have not yet sold their old apartment. 28 supported the bill without opposition.
 
It is important to note that this extension is not an across-the-board rejection of the period in which housing enhancements will not be taxable, but rather a seven-month period which will not be counted when qualifying people own two apartments in Israel. Unless a further extension is introduced, the count will immediately resume on October 1, 2020. 

According to reports of the Chief Economist in the Ministry of Finance, the number of housing enhancers who purchased a new apartment and are now experiencing difficulty in selling their old home is constantly rising. This relief is therefore critical in ensuring these buyers do not find themselves facing unexpected tax charges.

Until a few years ago, in parallel to purchasing an additional apartment, housing enhancers could own two apartments in Israel for up to two years. Previous Finance Minister, Moshe Kahalon, cut this period to a year and a half, and this was due to expire in the coming year. The rationale for shortening the period was due to reports that apartment owners were purchasing a new apartment for residence and waiting as long as possible on the sale of the old apartment, in order to benefit, at the same time, from the increase in the apartment’s value. The Ministry of Finance argued that this course contributed significantly to the rise of prices in the market and therefore decided to shorten the period.

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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.

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