When a property transaction takes place, a number of different taxes apply.
When land is sold, the capital gain accrued known as Betterment is taxed under the Land Taxation Law (Betterment, Sale and Purchase) of 1963.
There is a mutual relationship between the Land Taxation Law and the Income Tax Ordinance: Betterment Tax is an advance payment on account of Income Tax, and Betterment is part of taxable income for the purpose of determining tax rates and credits.
Income tax is payable on a property transaction carried out to realise an investment, such as the sale of a block of flats by a developer, as well as a commercial venture.
Betterment Tax is payable on sale of an interest in a property. Under the law an "interest" has a broad definition and refers to ownership, a lease in excess of 25 years, an easement, right of first refusal, protected tenancy, granting of an option, compulsory purchase, sale with a pending warranty, barter deal, property association action etc.
The Land Taxation Law provides for tax exemption for certain types of sales such as an individual selling a single dwelling unit once in 18 months, or an individual selling a dwelling unit once in 4 years; the exemption is conditional on the vendor applying for it and selling his entire title to the dwelling.
Exemption is also granted when an individual transfers a dwelling to a relative (as defined by law), or sells a dwelling inherited from the owner of a single dwelling who would have been exempt had he still been alive and sold it at that time, provided the inheritor is a descendant or the widow/er of the deceased.
Exemption from Betterment Tax is also granted when two dwellings are exchanged for a third one, the second dwelling being sold within 12 months of the first and the value of the two dwellings sold not exceeding a certain sum laid down by law.
Purchase tax is payable on acquisition of an interest in a property. This is a progressive tax based on different tax brackets applied to the purchase of a single dwelling, an additional dwelling, or other property.
For a gift transaction between relatives without consideration, a third of the normal purchase tax is payable.
When determining Betterment certain expenses are deductable, such as those incurred in order to increase the value of the property, purchase tax paid on acquiring the property, brokers' fees, lawyers' fees, property tax paid in the past, Betterment levies etc.
When paying Betterment taxes on a property used to generate income, depreciation is also deducted.
Local authorities impose Betterment levies on property sales in respect of the appreciation in the land value resulting from zoning changes enabling the built-up area to be increased or altering the designation.
The Israel Land Administration charges a capitalisation fee on transactions affecting its property, comprising the capitalised value of the balance of future ground rent due, thus exempting the lessee from payment of an assumption fee. Capitalisation is a financial process and does not constitute transfer of the title to the property.
If the capitalisation is not applied when the property is sold, the Land Administration charges an assumption fee equal to one third of the value of the land.
For additional benefits beyond what is covered in the leasing agreement the Land Administration charges a permit fee, payable in cases of extensions added to existing structures, rezoning, and partition of a lot.
The permit fee is waived when the indoor floor area of the structure and extension does not exceed 160 sq. m.
Tax Planning in Property Transactions
The tax burden involved in property transactions is liable to reach half of the value of the property if not more.
There are a number of ways of reducing tax expenses in property transactions, the saving possibly applying to one or more of the taxes or compulsory payments associated with the transaction. Tax planning is also designed to save taxes or avoid tax liability in future transactions subsequent to the purchase.
The many provisions of the law prescribing the various taxes applying to property transactions appear in a large number of laws and regulations. The actual provisions of the law are worded in a legal style often making interpretation difficult. For carrying out tax planning familiarity is also needed with court rulings interpreting these provisions.
The taxpayer has to plan his moves in such a way as to save tax payments, but on the other hand to avoid being drawn into aggressive tax planning giving the transaction an over-legalistic appearance misrepresenting the economic content of the transaction, just for the sake of evading tax—such a deal will be disqualified by the tax authorities and taxes at the legally set rates will be charged.
Our firm employs lawyers with many years' experience in carrying out all types of property transactions and represents a large number of developers and purchasers.