Government announces tax cut for real estate investors and foreign-resident buyers of homes in Israel

The purchase tax (known as Mas Rechisha) imposed on property investment in Israel has been significantly reduced in order to encourage activity within the local real estate market during the Corona crisis. The decision by the Minister of Finance, Israel Katz, was approved by the Knesset on August 29, and  immediately went into effect.

According to Israeli law, an “investor” is defined as a resident of Israel who owns more than one apartment in Israel, or a foreign resident who purchases property in Israel.

Until now, the purchase tax for investors has been 8% on the price of an apartment up to 5.34 million shekels, and 10% of the remaining amount above this threshold. Now, the tax steps were reduced to 5% on any value up to NIS 1.292 million, 6% on the amount above 3.877 million shekels, and three additional tax steps with the highest being 10% on any portion above 17.794 million shekels.

Purchase Tax on Investors in Israel

Calculate the Purchase Tax using the Mas Rechisha Calculator in English

The new ruling cancels one of the most significant steps taken by former Treasury Minister, Moshe Kahlon, who, upon entering his role in 2015,  was charged with the responsibility of lowering housing prices after seven consecutive years of prices rising sharply. In order to achieve this, he took a series of steps which were intended to reduce the high demand for apartments, especially on the part of investors and foreign buyers. In June 2015, as part of this policy, Kahlon raised the purchase tax for investors from 5% to 8%. This rate was supposed to be valid through 31 December, 2020.

Following the tax markup in 2015, investment activity in the Israeli housing market decreased significantly.  At its peak, investment accounted for 25% of all transactions in the market, but from June 2015, when the tax was raised, the purchases made by investors fell to 13% of total transactions. As investment in local real estate was discouraged, many Israeli investors took their money outside of Israel and bought real estate in other places such as Portugal, Germany, the UK, and the United States.

About two months ago, near the beginning of the economic crisis created by Covid-19, Kahlon’s term as Minister of Finance ended. The change in policy, introduced by the new minister Israel Katz,  was created in order to stimulate movement in the housing market, and to assist the Israeli construction industry, which generates billions of shekels each year, to emerge from the severe economic crisis. The Ministry of Finance also hopes that the move will keep Israeli capital in the local real estate market rather than see it flow abroad.

The stock market is particularly volatile at the moment and many investors, both Israeli and foreign, have been badly burned in the capital markets. The real estate market in Israel is a stable market and yields a reasonable return. Reducing a direct tax such as the purchase tax, makes the investment only more rewarding. 

In recent weeks, Minister of Construction and Housing, Yaakov Litzman, initiated the introduction of lower purchase tax in peripheral areas only. This new ruling eliminates Litzman’s initiative and includes areas of high demand as well, since this is where most real estate activity takes place. While the state may now “earn” less on individual investment transactions, the anticipated increase in the volume of transactions is expected to be worth it.

There is a concern, however, that with increasing the demand among investors, first-time home buyers may be hurt, yet again, by inflated prices, in an already expensive housing market. It is important to note that investors and the first -time buyers often compete with one another on less expensive apartments, priced between 1.5 to 1.7 million Shekels. Increasing demand among investors is likely to affect the price of such apartments  –  pushing it upward.

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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