The betterment levy, known in Israel as hetel hashbacha, is one of the only taxes that may actually make you feel quite lucky. This tax is levied when a municipal planning decision significantly increases the value of your property. However, before you rush to pay it, there are a few important things to understand: How is it calculated? At what point does it need to be paid? Can and should you appeal it?
There are not many events in our lives that are like winning a lottery when hundreds of thousands or even millions of shekels fall in your lap without any effort at all. However, sometimes, if we’re lucky, the real estate world can actually provide us with a similar experience. Every week, arbitrary decisions are made by the various planning institutions that can increase the value of our property exponentially. For example, these decisions include the approval of municipal building master plans that increase the construction rights in a neighborhood, permits to turn a residential unit into an office, or even seemingly minor decisions, like allowing a homeowner to close off a balcony in order to turn make another room. All of these cases add significant value to the property, increasing both our quality of life in our home as well as the potential selling price. At the same time, they lead us to incur a tax known as hetel hashbacha.
How is the betterment levy calculated?
However, according to Israel real estate laws, these benefits so graciously gifted to us by the planning institutions must be taxed – and this tax is known as the betterment levy. The amount of the tax is 50% of the increase in value of your property due to the planning decision, after deducting the construction costs required to implement the new plan. For example, if a planning decision allows us to add a room addition to our property which will increase its value by NIS 500,000, but it will cost NIS 100,000 to carry out the construction, then the actual value increase is NIS 400,000, and the betterment levy will be half of that amount, NIS 200,000. The tax, collected by the local municipality, finances the construction of the necessary infrastructure in the area, such as roads, schools, parks, and more.
At what point does the tax need to be paid?
While the amount of the betterment levy is generally calculated at the time when the planning decision is made, the property owner does not need to pay it immediately. There are two points at which the property owner would be obligated to pay the tax: either when they choose to implement the planning decision, or when they choose to sell the property. For example, if the planning decision allows a private homeowner to build another room on the roof of their property, they will have to pay the betterment tax when the building permit for this addition is issued. In the event that the homeowner decides not to exercise the building rights, they would not need to pay the betterment levy until they decide to sell their property. Upon the sale of the property, the obligation is on the seller to pay hetel hashbacha — the buyer would be exempt from paying the tax, even if he ultimately carries out and benefits from the renovation.
In most cases, the evaluation that determines the increase in the value of the property is carried out at the time the planning decision is made, but sometimes the authority chooses to postpone the procedure until the time at which the building permit is issued or the owner decides to sell. However, the property owner reserves the right to demand immediate payment of the betterment levy, even if they do not intend to sell or do construction in the immediate future. From the time that the owner of the property contacts the authority to request payment of the tax, the municipality must conduct the value assessment within 90 days.
Is it possible to dispute the betterment levy?
On the surface, paying the betterment levy may seem like a relatively simple procedure. However, in reality, it can get quite complicated, often involving disagreements, disputes, and lengthy hearings in various courts which may result in many additional expenses for the taxpayer beyond the hetel hashbacha itself.
Because the body that collects the betterment levy is the same one that determines the amount due to be paid (through a real estate appraiser working on the municipality’s behalf), one could argue that it is possible or even likely that the municipality may demand a higher value than would be determined by an objective third party. Because of this suspicion, the property owner has the right to dispute the tax within 45 days of receiving the appraisal. However, since the legal proceedings can cost more than tens of thousands of shekels, the property owner must consider whether the amount being charged really justifies this expense, even if they do believe that it is too high.
If a property owner decides to make an appeal, there are two different routes. In the first case, the property owner disputes the very fact that they are being charged a betterment levy at all. In this case, the property owner must file an appeal to the District Appeals Committee. In the second scenario, the property owner accepts the fact that they should be charged a betterment levy, but disagrees with the amount. In this case, they must appeal to the chairman of the Real Estate Appraiser Council, requesting an additional appraisal. The fee for this appraisal will be split equally between both parties – the municipality and the property owner making the appeal – unless the appraiser decides that only one of the parties is liable to pay. It should be noted that even in the first type of appeal submitted to the District Appeals Committee, there is a high chance that an “advisory appraiser” will be appointed by the Appeals Committee, and also, in this case, the fee will be split equally between the appellant and the local authority, unless the Appeals Committee decides otherwise.
In any case, even if there is a dispute over the payment of the levy itself or the final amount, it is possible to proceed with the procedures for which the payment is required – either selling the property or applying for a building permit – provided the property owner has secured guarantees that, if necessary, they will be able to pay the total amount required by the local authority.
How does it work with urban renewal?
In the field of urban renewal, the betterment levy is of special importance, since an exemption from it is used to incentivize and encourage urban renewal.
The Tama 38 plan, enacted with the aim of strengthening the foundations of old houses built before 1980, and financing it through increasing building rights, includes in its provisions an exemption from the betterment levy on increasing rights. It should be noted that this exemption, set5 by the government, has created great disagreement between the central government and local municipalities that have lost a significant source of income. This is also one of the reasons why many local authorities are hostile toward Tama 38 and try to create as many obstacles as possible to implementing the plan in their territories.
In pinui-binui projects, too, the betterment levy is considered a significant tool for kick-starting projects, where the exemption is not absolute but rather at the discretion of each authority. Due to the high land values in Tel Aviv, for example, projects can be promoted there that will be economically sufficient for the developer even if a full betterment levy is demanded. In peripheral areas, however, exemption from the betterment levy is a necessary condition for the economic feasibility of projects.
Until recently, authorities used to decide whether a levy would be levied, and at what rate, on each project specifically. This conduct created quite a few problems for developers, who could not estimate in advance what tax rate they would be charged. Recently, the planning laws have been changed so that each authority will have to decide on a clear and permanent policy on the subject for the next five years in order to increase the level of certainty of the developers in the field. By May 1, local committees had to announce whether, and in which areas, they intended to levy a full betterment levy on pinui-binui projects, charge a reduced betterment levy of 25% for the improvement, or grant a full exemption.
Predictably, most of the central region authorities have announced their intention to charge the full betterment levy for urban renewal development in all parts of their cities. This was decided in Tel Aviv, Ramat Gan, Givatayim, Herzliya, Bat Yam, Holon and Netanya. In Kiryat Ono, on the other hand, the local committee decided on a full exemption from the levy, as did Ashkelon. Jerusalem and Petah Tikva announced an exemption in most parts of the city, except for a number of neighborhoods where a full levy will be levied (for example – central Jerusalem). The Haifa Municipality announced that a reduced levy of 25% will be levied in all parts of the city, except for the expensive Carmel ridge, where the full betterment levy will be charged.
In conclusion, in most cases, hetel hashbacha, or betterment levy, is a tax that most property owners would be happy to be charged because it means that a planning decision significantly increases the value of their property. That being said, this does not mean that we are obligated to pay whatever amount is being charged because the body determining the value of the tax is far from objective on the matter. In the case of urban renewal, an exemption from the tax can be used as an incentive to encourage development, but where no exemption is granted, developers pass on the charge to the buyers, driving exorbiant home prices up further.