Two legislative amendments in the field of Israel real estate tax do not bode well for investors and foreign residents. Firstly, the Ministry of Finance wants to set in stone the purchase tax rate of 8% in a way that will make it difficult to alter in the future. And secondly, tax levels are expected to increase for home sellers. But there’s good news too — purchase tax brackets have been updated slightly reducing the tax due on purchases.
In light of the severe slowdown that has struck the residential real estate market in Israel, especially after the outbreak of the Iron Swords War, some assumed that the state would employ one of the proven and effective tools to stimulate the market, which has been employed in the past, namely reducing the purchase tax (Mas Rechisha) for investors. But surprisingly, a memorandum of law released last week for public comment suggests the exact opposite.
Permanent high purchase tax for investors and foreign buyers
According to the memorandum published by the Ministry of Finance, the high tax rate on the purchase of real estate for investment purposes and/or by non-residents, which currently stands at 8% from the first shekel, will be determined through legislation and become a permanent tax. This is in contrast to the existing situation, according to which the high tax was determined through a “temporary order” that was expected to expire at the end of 2024 when the tax returns to its previous rate of 5%.
The reason stated in the explanatory notes to the law is a desire to continue moderating the rates of demand for investment homes, and thus to continue the trend of decline in housing prices that began in the past year (a decline of 1.8 percent between November 22 and November 23). “Purchase tax rates on a second home have been raised (fixed) until the end of 2024 to moderate the demand for home purchases by investors and help curb the increase in home prices,” it said. “This attempt has not yet achieved its goal of moderating home prices. Therefore, to moderate the demand by investors and limit a potential increase in home prices, it is proposed to anchor purchase tax rates as a standing order.”
It is important to emphasize that at this stage, this is not a valid law, but rather a preliminary legislative initiative of the Ministry of Finance, which will likely encounter opposition throughout the legislative process.
Increased capital gains tax with the cancelation of a benefit
Another memorandum of law published by the Ministry of Finance is expected to significantly increase the tax burden on those sellers who own more than one apartment. Capital Gains Tax is generally imposed on the increase in the value of a property from the date of purchase until the day it is sold. Until now, sellers who own more than one apartment have enjoyed a benefit, which the Ministry of Finance intends to cancel. Those who own a single apartment are exempt from this tax.
Currently, tax collection from those who own more than one apartment is at a rate of 25% only from 2014 and onwards —before this year no tax is due at all. The calculation is done linearly, where the longer the period in which the apartment owner held the property before January 1, 2014, the less tax he will pay.
For example, a person who purchased a second apartment 20 years ago, in 2004, and the value of his apartment has since risen by NIS 2 million and is selling it now, will pay 25% tax only on the proportion of betterment derived from the number of years that have passed since 2014. Since this is ten years, half of 20 since he purchased the property, the 25% tax will apply only to half of the betterment, i.e. NIS 1 million, and the tax due will be NIS 250,000. If an apartment purchased in 2014 had accumulated the same appreciation over only ten years, the tax that would now be paid upon sale be twice as much, i.e. half a million shekels which is 25% on the entire betterment. On the other hand, if the apartment had been purchased 40 years ago, the betterment portion that would have been taxed would have been only a quarter (10 years out of 40), and the tax would have been NIS 125,000. And so on.
The Ministry of Finance wishes to put an end to this benefit, requiring that from 2026, it will be gradually canceled, until within a few years owners of two or more apartments will pay the full capital gains tax. Postponing the tax increase for another two years is intended to encourage those interested in enjoying the benefit to put their apartment up for sale shortly, thereby increasing the supply of homes.
The explanatory notes stated: “The aforementioned exemption creates a negative incentive for residential real estate investors to sell the apartments to continue enjoying the exemption from paying tax on betterment created before January 1, 2014. This is especially true of apartments held for many years by their owners for investment purposes. This negative incentive harms the supply of homes for sale and contributes to an increase in home prices.”
It was also noted that this is a regressive tax benefit, “enjoyed mainly by owners of apartments for investment in high-demand areas in the center of the country,” and that at this time of budgetary challenges against the background of the war, action should be taken to reduce this benefit.
“Therefore, to encourage the entry of additional apartments for sale in the housing market, and to equalize the tax burden applicable to sellers of investment apartments regardless of the date of purchase, it is proposed to cancel the beneficiary linear calculation gradually so that from 2026 onwards, the betterment accumulated during the capital gains tax exemption period will also be charged.”
Purchase Tax brackets have been revised
Meanwhile, on January 16, the Tax Authority revised the level of the purchase tax (Mas Rechisha) brackets upward, in a manner that is expected to reduce the amount paid by home buyers. The current tax brackets will remain in effect until January 15, 2025. The tax brackets are different for purchasers of a single apartment (first-time buyers or home improvers) and for those purchasing a second apartment or more, where the tax is significantly higher.
According to the current tax brackets, the buyer of a single apartment will be completely exempt from paying purchase tax on the part of the value up to NIS 1,978,745. This represents an increase of about NIS 60,000 in the tax-exempt price threshold, compared with NIS 1.919 million according to the previous levels.
The portion of the value exceeding NIS 1,978,745 and up to NIS 2,347,040 will be subject to purchase tax at a rate of 3.5%. The portion of the value exceeding NIS 2,347,040 and up to NIS 6,055,070 will be taxed at a rate of 5%. The portion of the value exceeding NIS 6,055,070 and up to NIS 20,183,565 will be taxed at a rate of 8%, and the portion of the value exceeding NIS 20,183,565 will be taxed at a rate of 10%.
For example, in the case of purchasing an apartment for NIS 2.2 million, the portion of the value up to NIS 1,978,745 will not be taxed at all. The portion of the value exceeding NIS 1,978,745 and up to NIS 2,200,000 will be taxed at the rate of 3.5%, which is NIS 7,744. This is in contrast to a tax of NIS 9,830 that would have been paid according to the brackets that were in effect as of 15.1.2024 on the purchase of an “additional apartment” (which is not a unit). 8% tax will be collected from the first shekel, up to the portion of the value up to NIS 6,055,070. The portion of the value exceeding NIS 6,055,070 will be taxed at the rate of 10%. For foreign buyers and new immigrants see the updated Mas Rechisha rates or use the Buyitinisrael Purchase Tax Calculator.
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