Israel’s real estate tax laws allow new immigrants to save a fortune when buying a home in Israel. Buyers may be considered “Israeli residents” for the purpose of the transaction — even if they immigrate up to two years later, and may be eligible to reduced purchase tax, among other tax benefits. Foreign residents, however, should be wary of high real estate taxes, especially when finalizing the deal from their country of residence.
As we all know, real estate taxes are a very important consideration when buying or selling an apartment anywhere in the world. If you’re making Aliyah, returning to Israel after a long stay abroad, or even purchasing a property in Israel without the intention of immigrating, understanding the fine print of Israel real estate tax laws may save you tens of thousands of shekels, or more.
Careful tax planning must be done both when purchasing or selling an apartment in Israel, events which may have additional tax implications in the purchaser’s country of origin as well.
Tax benefits for those who become residents within two years of buying real estate in Israel
The real estate tax due when purchasing an apartment in Israel is known as Purchase Tax (Mas Rechisha). Israeli residents who buy a home at a purchase price of up to approximately NIS 1.75 million that is considered their only residential property are entitled to an exemption from Purchase Tax, known as the Single Residence Benefit. Taxes are due on home purchases above this threshold but at a reduced rate. Buyers who own at least one other apartment in Israel, however, are taxed at rates starting from 5%.
According to Israel Tax Authority, when it comes to foreign-residents, buyers are automatically taxed according to the real estate tax brackets applied to those who own multiple properties – that is, a minimum rate of 5% – regardless of whether or not this is their only apartment.
However, according to Adv. Yitzchak Shaulson, owner of a law firm that specializes in real estate and represents foreign residents purchasing property in Israel, buyers who intend to immigrate to Israel soon after the purchase may actually be eligible for the same tax breaks as Israeli residents.
“In order to qualify for the exemption, the immigrant must be a resident of Israel,” explains Shaulson, “however, he is entitled to the benefit if he becomes a resident of Israel within two years of the purchase date. The same applies to a ‘Veteran Returning Resident’ (toshav chozer) — someone who moves back to Israel after more than 10 years abroad. It is important to emphasize, however, that anyone who left Israel within 5 to 10 years before the purchase date may not be entitled to this real estate tax benefit, even if he returns to Israel within two years of the purchase date — in this case, in order to qualify for the benefit he must be an Israeli resident on the date of purchase.”
As for the question of who is considered an “Israeli resident,” Shaulson responds that although there is a formal definition that stipulates a minimum number of days per year in which an Israeli resident must be in the country, “it is generally accepted that one is considered an Israeli resident if ‘the center of his life’ is in Israel, based on a few logical parameters: Is he raising his family in Israel? Does he have an active bank account here? Does he pay income and property taxes? And so on.”
A once-in-a-lifetime benefit
In addition to the Single Residence Benefit, new immigrants are also entitled to reduced tax brackets when purchasing property in Israel, even if it is not the only apartment they own in Israel. The Aliyah Tax Benefit depends on a number of conditions: the apartment must be purchased between one year prior to Aliyah and up to seven years afterward, and the buyer must live in the property (as opposed to renting it out). Very importantly, this benefit can only be used once in a lifetime – so it should be used wisely.
Purchase tax rates for new immigrants start at 0.5% from the first shekel up to NIS 1.842 million. According to Shaulson, in the case of a Single Residence, olim can choose which of the real estate tax benefits will be more profitable for them. “When buying a less expensive apartment, it could make more sense for an immigrant to apply the Single Residence Tax benefit, starting at 0%. For apartments of approximately $1.7 million or more, it may be more profitable to apply the Aliyah Tax Benefit.”
Non-residents may also benefit from a sales tax exemption
When selling property in Israel, the seller is taxed on the increase in the value of the apartment since its purchase – known as the Capital Gains Tax (mas shevach). Israeli residents are exempt from this tax when the conditions set out in the law are met, mainly provided the apartment being sold is their only property and they have owned it for at least 1.5 years.
Shaulson points out that every qualifying Israeli resident is entitled to this exemption, even if they own additional properties abroad. “Foreign residents, however, are required to prove that they do not own any other residential real estate abroad in order to receive this tax break,” warns Shaulson, “I, therefore, recommend that foreign residents who are thinking of making Aliyah or returning to Israel in the near future wait until they are Israeli residents before selling their sole property in Israel.”
While the sale may be in Israel – the tax may be collected abroad
When foreign residents sell property in Israel, they must also consider the implications this transaction may have on their tax bracket – specifically in their country of residence. According to Shaulson, “Sellers will usually be required to pay Capital Gains Tax, whether in Israel or in their country of residence. Either way, there are international tax treaties that prevent double taxation, and in most cases, the seller will be required to pay the higher of the two. It is important to note, however, that in a case where the seller is exempt from the Capital Gains Tax in Israel, the tax may still apply abroad. Clients making this type of transaction must use a tax advisor that specializes in the tax laws in their country of residence as well as a professional in Israel.”
Use the our Purchase Tax Calculator to calculate the Mas Rechisha due on your property purchase in Israel.