The Israeli real estate market is set to experience significant shifts in 2025 as the government rolls out a series of tax reforms to address unprecedented economic challenges. With the costs of the recent conflict surpassing NIS 100 billion (USD 30 billion), these changes are designed to generate revenue and recalibrate a market that has shown remarkable resilience. From an increase in Value Added Tax (VAT) to changes in capital gains tax and purchase tax brackets, these reforms will impact property prices, transaction costs, and investment strategies. Understanding these developments is essential for navigating the evolving real estate landscape. Here’s an in-depth look at the key changes and their implications.
1. VAT Increase: Higher costs for new construction and beyond
Effective January 1, 2025, Israel’s Value Added Tax (VAT) will rise from 17% to 18%, directly affecting the purchase price of new construction properties and commercial real estate transactions. This change will also apply to outstanding payments on previously purchased properties. For instance, the remaining balance of NIS 1,000,000 will increase by NIS 8,547 due to the higher VAT rate.
In addition to impacting property prices, the VAT increase will raise costs for professional services such as real estate brokers, lawyers, architects, interior designers, appraisers, etc. These services, often essential for property transactions, will now come with higher fees, increasing the overall cost of buying or selling property.
This broad application of the VAT increase will also influence second-hand property prices as the market adjusts to maintain parity between new and existing properties. Buyers and sellers must carefully account for these additional costs when planning transactions.
2. Freeze on Purchase Tax brackets: The hidden inflationary tax
Another impactful reform is the freeze on purchase tax brackets from 2025 to 2027. Typically, these brackets are updated annually to account for inflation, but by halting these adjustments, the government is effectively increasing the real tax burden on property buyers.
As inflation persists but brackets remain static, buyers will pay more in real terms, and tax exemptions will lose value. This measure will likely raise transaction costs and reduce the affordability of specific buyer exemptions.
3. Changes to Capital Gains Tax for pre-2014 properties
One of the most significant proposed reforms, pending final approval, involves the calculation of capital gains tax on properties purchased before 2014. A linear calculation method currently eliminates tax liability on gains accrued before January 1, 2014.
Under the new system:
- A 10% tax will apply to pre-2014 gains starting in 2026.
- This rate will increase to 20% in 2028 and reach the full 25% rate by 2030.
For long-term property owners, the financial impact could be substantial. For instance, a property purchased in 2000 for NIS 1,000,000 and sold in 2030 for NIS 5,000,000 would face significantly higher tax liabilities under the new system, potentially doubling compared to the current regime.
This proposed change has already spurred market activity as property owners rush to sell before the more favorable tax regime is phased out.
4. Surtax Expansion: Higher taxes on Capital Gains for high-income sellers
The surtax system is also undergoing significant changes. Currently, a 3% surtax applies to annual incomes exceeding NIS 680,520. Starting January 1, 2025, an additional 2% tax will be imposed on capital gains exceeding NIS 721,560, including profits from non-residential property sales.
The surtax will be collected on apartments sold above 5,238,000 NIS. For high-income property sellers, this means a potential combined surtax of 5% on profits, substantially increasing their overall tax burden. Sellers should consider this change when planning transactions in 2025 and beyond.
Why these changes matter
These reforms serve two primary objectives. First, they aim to generate much-needed revenue to address the substantial financial burden of the recent conflict, with costs exceeding NIS 100 billion. Second, they seek to temper demand in Israel’s robust real estate market, which has remained resilient despite economic challenges. The government hopes to create a more balanced and sustainable property landscape by recalibrating market dynamics.
Implications for buyers, sellers, and investors
The new tax environment will demand more strategic approaches from market participants. Buyers must carefully plan their timing and costs, especially considering the VAT increase and the freeze on purchase tax brackets. More importantly, they must readjust their budgets for realistic and updated transaction costs. Sellers, particularly high-income individuals, and long-term property owners, must reassess their strategies to optimize tax positions before the new rates take effect. Meanwhile, investors will face higher transaction costs and increased capital gains taxes, making it essential to review and adapt their investment strategies and portfolios to align with the evolving landscape.
Looking ahead
The full impact of these tax reforms will unfold over time as the market adjusts to the new fiscal landscape. While the immediate effects may create uncertainty, long-term implications depend on how market participants adapt to these changes.
As these changes take effect, navigating Israel’s real estate market will become increasingly complex. Success in 2025 and beyond will require meticulous planning, informed decision-making, and professional guidance. Buyers, sellers, and investors should prioritize seeking expert advice to structure transactions strategically, reduce tax liabilities, and adapt to the evolving market dynamics with confidence.
Adv. Yitzchak Steinberg specializes in representing foreign residents in Israeli real estate transactions. With years of experience and thousands of successful deals, he is a trusted expert in guiding international clients through the complexities of Israeli property law. Yitzchak can be reached by email at [email protected].
