Proposed cancellation of Purchase Tax on investment in peripheral areas in Israel

Only one month after starting his new role as Minister of Housing and Construction, Yaakov Litzman is spearheading the cancellation of the Purchase Tax (Mas Rechisha ) on investment apartments in peripheral areas of Israel. The proposal was sent to the Minister of Finance, Israel Katz, about a week ago, recommending the tax continue to be levied on investors in the center of the country, while in the periphery, it would be cancelled.

Purchase Tax was intended to keep investors away

The Purchase Tax in Israel is weighted on investors, that is, Israelis who own more than one residential property; and non-residents who own even a single property in Israel. In recent years, the tax rate for investors has been increased twice, in 2013 and in 2015, with the aim of keeping investors out of the market and reducing their interest in investment, thereby suppressing the elevated prices that characterized the Israeli apartment market between 2008 and 2015. Indeed, the tax markup in June 2015, which brought the tax rate for investors to between 8% and 10%, succeeded in reducing the the number of investors in the market and contributed to a moderation in the rate of price increases.

In his letter to Katz, Litzman expressed support to retain the higher taxes on investors in the center of Israel where there remains high demand for apartments but claims that the periphery should be treated differently. Litzman said that in the past two years the State had tried to market land to build tens of thousands of apartments in the periphery, but most of these initiatives failed due to the lack of demand by contractors who feared that they would have difficulty selling the apartments.

MK Yakov Litzman – Roman Yanushevsky / Shutterstock.com

Cancellation of Mas Rechisha could do good and bad for the economy

Cancellation of the Purchase Tax would  require the support of the Ministry of Finance and the Israeli Tax Authority, which until now have not given their positions on the issue. On the one hand, Israel is currently in a budget deficit, which is only growing on the backdrop of the Corona crisis. In May, the deficit reached 6% of the GDP, double the rate recorded in February (3.1%).  It may therefore not be in the Treasury’s interest to reduce taxes now. On the other hand, if the initiative is to bring about economic awakening, the State will earn from the taxation of the business activities of the contractors, as well as the sale of land by the Israel Land Authority, which is subordinate to the Housing Ministry that holds and manages 93% of land in the country.

In the real estate industry, Litzman’s initiative has been received with mixed emotions. Contractors have welcomed the plan which should encourage investment. Raul Srugo, head of Israel Association of Contractors, praised the initiative and said that “in the context of the harsh influence of the Corona crisis on the sector, the Government must take immediate action to promote construction. Among other things, the Housing Minister is correct in leading a reduction in taxation”. However, according to Srugo, it is not only necessary for Litzman to settle for a tax cancellation in the peripheries, but rather to cancel the Purchase Tax altogether, for a period of six months, “to help investors, housing upgraders, and foreign residents who view Israel as their home base and plan to make Aliyah in the future.”

Thorough investigation required before implementing the initiative

There are also those that are sceptic of the plan, claiming that comprehensive research is necessary to examine its consequences. According to an expert in real estate taxation who spoke to Buyitinisrael, “the Purchase Tax is the most significant real estate tax in Israel. Data published recently by the Tax Authority indicates that the State revenues in 2019 from the tax were approximately NIS 2.56 billion, therefore any change in the tax regime will inevitably lead to social and demographic changes which may have dramatic effects. For example, if you increase the amount of apartments built in the periphery, there may be consequences on the transportation system. Critics also argue that encouraging investment will raise prices in the peripheral areas which in turn will affect home buyers. There are also those who question who will be renting these investment properties?   It is therefore important to consider the full effects of changing the tax rule through thorough research and examination and to refrain from promoting ideas that may not succeed in attaining their goals.

Investment in real estate in Israel remains a favorable option

Regardless of the levels of taxation, it is likely that investors, both local and foreign, will return to the Israeli real estate scene. While stock markets and commercial real estate around the world have been hit hard by the Corona pandemic, residential real estate, particularly in Israel where there is a shortage of housing and a growing population, appears to be a more stable and long-term investment.

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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