Capital Property Consultants

A General Guide to Taxation on Property

There are various types of taxation applicable to residential real estate acquired, held and sold in Israel.
Real estate is subject to:
1. Purchase Tax (Mas Rechisha) when it is acquired
2. Capital Gains Tax (Mas Shevach)and Sales Tax (Mas Michira) when it is sold
3. Municipality (Arnona) when it is held
4. Income Tax (Mas Hachnassa) when it generates rental income.

Property Tax (Mas Rechush) has been cancelled

Purchase Tax:
Purchase Tax is levied on the purchaser of real estate. The below deals with the Purchase Tax payable in respect of the purchase of a "residential dwelling" which is defined as a dwelling that has the attributes of a residence (i.e. kitchen, bathroom) and whose construction is completed. A building under construction will be considered a residential dwelling if the selling contractor undertakes, in the sales agreement, to complete construction.
The Purchase Tax in respect of residential dwellings is an incremental (progressive) tax. In order to calculate the tax, the total purchase price of the dwelling is divided into three (3) levels or brackets and a different rate of tax is applied to each bracket, as follows:

Bracket 1 is subject to tax at the rate of 0.00%
Bracket 2 is subject to tax at the rate of 3.50%
Bracket 3 is subject to tax at the rate of 5.00%

The range of each bracket is adjusted every 3 months in sheqel terms in accord with changes to the Israeli Consumer Price Index and at present is closely equivalent to the following:

Bracket 1 (0. 00%) – First $130,000
Bracket 2 (3.50%) – Next $32,000
Bracket 3 (5.00%) – on all amounts above $162,000

The first bracket has been 0.5% for many years however, backdated to the 1 July 2005, the rate was reduced to zero and the bracket widened. This reduction, initially for one year, was to designed to stimulate the property market.

A New Immigrant (Oleh) or a Temporary Resident holding a B-1 visa, pays a reduced rate of Purchase Tax on residential property purchased within seven years of Immigration (Aliyah).In the event that the Immigrant wishes to purchase the residence prior to making Aliyah, the reduced rate will also apply if the purchase is made within one year prior to the date of Immigration. In this case, the tax must be paid in full and the excess will be refunded with proof of Aliyah.The rate also changes with Israeli Consumer Price Index and is roughly equivalent to the following:
Bracket 1 (0.50%) – on the first $248,000
Bracket 2 (5.00%) – on all amounts above $248,000

The amounts change with the dollar exchange rate and the inflation of the Israeli Sheqel.


Capital Gains Tax:
A person selling a property (or part of a building) must pay Capital Gains Tax (also referred to as Land Appreciation Tax) on the difference between the purchase price for which the property was purchased and the consideration received in connection with its sale. The rate is currently 25%. However property acquired before 11/2001 are subject to rates up to 50% according to when the property was acquired. Exemptions from Capital Gains Tax are available in connection with the sale of a residential dwelling. For purposes of the exemption, real property is considered to be a residential dwelling if it meets all of the following criteria:

• Construction of the dwelling has been completed.
• The dwelling is owned by an individual and not by a company.
• The dwelling actually serves as a residential dwelling or contains all the attributes of a residential dwelling (i.e. kitchen, bathroom etc.).
• The dwelling does not constitute the business inventory of the seller - i.e., the seller is not in the business of selling real property.

Exemption from Capital Gains Tax in connection with the sale of a residential dwelling is available in the following circumstances:

• The owner of a residential dwelling who has not owned more than one residential dwelling at any time during the four years preceding the sale of the dwelling is entitled to an exemption from Capital Gains Tax.
• An exemption has not been granted in the previous one and half years.
• A person who purchases a second, replacement residential dwelling within nine months prior to the sale of his residential dwelling is still deemed as owning only one residential dwelling and is entitled to the exemption. It should be noted that this exemption is available only with respect to the sale of at least a fifty percent interest in the subject dwelling.
• Every person is entitled to an exemption from Capital Gains Tax in respect of the sale of one residential dwelling once in every four years, regardless of the number of dwellings owned by such person.

Special rules apply to dwellings received as gifts or as part of an inheritance or testamentary bequest.

It is important to note that to be entitled to any of the foregoing exemptions the seller must sell all of his interest in the dwelling without retaining any ownership interest therein.


Sales Tax:
The sales tax, levied on the seller, applies to commercial property and plots and to residential property by companies. There is no tax on residential property sold by private individuals. The tax rate is 0.8% - 2.5% of the sales price.

Income Tax:
Income received by an individual from the rental of a residential dwelling is currently exempt from Income Tax pursuant to the provisions of temporary legislation. The exemption applies to aggregate rental income in any month from one or more dwellings up to a specified maximum amount. This amount is linked to the Israeli Consumer Price Index and is adjusted quarterly. Currently this amount is NIS 7000 Please note that this exemption is temporary although this law has already been reviewed and extended in past years.
Rental income above the NIS 7000 threshold is taxed at a rate of 10%. (No deductions for expenses or depreciation can be taken into account.)

The law does not apply to dwellings not used exclusively for residential purposes Accordingly, it is suggested that the rental agreement contain a provision expressly restricting the use of the dwelling to residential purposes

Property Tax:
Property Tax which was levied on undeveloped plots not utilised for either residential, commercial, industrial or agricultural purposes has been cancelled. The sales tax was instituted in its place

Municipality Tax:
Arnona, or Municipality Tax is generally levied on buildings by the municipality or local authority in which the property is located. Rates of Arnona vary between different neighbourhoods in the municipality or local authority area. Rates are calculated in accord with the size of the property. Reductions are given for senior citizens, handicapped and new immigrants.

Municipality rates (N.I.S. per sq.m) on residential property in Jerusalem are calculated as follows:

Neighbourhood
Property Type	Apartment Type	A	B	C	D
1	Above 120 sq.m.	92.35	83.92	64.74	52.92
2	Below 120 sq.m.	76.52	61.37	45.68	32.98
3	Shared Bathroom	53.82	40.03	32.98	32.98
4	Built using Wood or Iron	32.98	32.98	32.98	32.98

The municipality uses the net square meters for its calculations. Net square meters are calculated without interior or exterior walls. Included are covered balconies over 6 sq.m., 20% of the area of penthouse balconies and 50% of storerooms. Gardens and parking areas are not included. The property offered by Capital is all in Area “A”

The information contained on this page is a general guide. Prospective purchasers must obtain specific legal and professional advice from qualified Israeli legal counsel or tax advisors.