The Israeli real-estate market is on the up and up. When it comes to taxes, the Israeli tax system is like Swiss cheese: full of holes. Although Israel imposes taxes on real-estate income and gains, there are numerous exemptions and exceptions.
If you are a non-Israeli resident investor, you should aim to legitimately minimize both Israeli and home-country taxes. Therefore, you need to plan with tax advisers in each country a number of aspects: (1) entities; (2) transactions; (3) finance; (4) avoiding double taxation Israel‘s tax treaties helps but only partly.
You will need to consider not only income tax but also acquisition taxes, betterment taxes, VAT, capital-gains tax, inheritance/estate tax, etc.
Here are a few hints regarding Israeli real-estate investments:
ACQUIRING ISRAELI REAL ESTATE
Israel imposes an acquisition tax on Israeli real-estate interests of up to 5 percent.
Tip: There are reductions for homes for new immigrants and those with no other home in Israel.
REZONING FOR CONSTRUCTION
Big profits are possible if agricultural land is rezoned as available for construction. Permission is needed from various bodies, and you may have to forfeit part of it for roads, etc. A ‘‘Betterment Levy‘‘ (typically 50% of assessed amount) and other fees will apply.
Tax Tip: Much Israeli land is held on a 49-year lease from the Israel Lands Administration. If the holder‘s time is up, consider renewing the lease with future rezoning ability.
REAL ESTATE CONSTRUCTION
If this is for you, there is a lot to check out. Construction can be for personal occupation, renting out, sale or service to others.
Check if this is a business activity having regard to your expertise and frequency of dealings regarding real estate.
Tax Tip: Businesses can sometimes recover input VAT on expenditure (16%) unless the construction is for residential rental. Long-term construction projects (more than one year) for customers are taxed in Israel only after 25% completion by value or quantity, at your option, is reached.
Non business status can sometimes reduce Israeli income tax on rental income. Businesses and non-businesses can both claim Israeli depreciation and finance expenses if certain conditions are met; sometimes these are substantial.
TAXATION OF RENTAL INCOME
Private landlords of Israeli homes pay no Israeli income tax if total monthly rental income is less than NIS 4,680; they lose NIS 1 of exemption for every extra shekel they make above that figure, but they have two more options:
(1) Israeli tax at 10% on gross rental income, if paid by January 30, regarding each preceding calendar year; or
(2) Israeli tax at regular rates on rental income net of expenses including depreciation of the building cost and mortgage interest.
Landlords of commercial property and companies get no exemptions; they pay regular tax on rent. Individuals pay tax on rent net of expenses and depreciation at rates of 30% to 45% plus National Insurance Institute payments at various rates. Companies generally pay company tax on rent net of expenses and depreciation at rates of 25%. Dividends are taxed at rates ranging up to 25%, subject to any double tax treaty.
Tax tip: Depreciation is on the building element, not on the land. This can sometimes reduce your tax bill a lot. The depreciation rates are 2% of cost for a good-quality building, otherwise 4%. Higher depreciation rates of 7% to 15% apply to mechanical and electrical equipment.
If the building element is unknown, you are allowed to assume it is two-thirds of the overall cost. Each asset is depreciated separately on a ‘‘straight line‘‘ basis (percentage of cost, not written down balance).
Regular Israeli individual tax rates range up to 45% in 2010. NII payments also apply at various rates but are minimal for UK residents.
Companies provide limited-liability legal protection. Insurance coverage against accidents, etc., is not always enough.
Israeli tax breaks are available for long-term residential-commercial rental projects, which are known as ‘‘approved rental buildings.‘‘
SELLING REAL ESTATE
Israel imposes ‘‘land appreciation tax‘‘ (LAT) on capital gains from Israeli real estate. The Land Registry (Tabu – a Turkish word) checks that you don‘t forget.
Companies generally pay 25% tax and individuals pay 20% if the real-estate asset was acquired after November 7, 2001.
Tax tip: Individuals are exempt from LAT on Israeli home sales in various cases, including: (1) After an 18-month waiting period following a previous exempt sale if they only own one home in Israel; (2) after a four-year waiting period following a previous exempt sale if they own more than one home in Israel.
It doesn‘t matter whether the seller is an Israeli resident or not, or what other properties the seller has outside Israel.
For assets acquired in 1961 or earlier, special reduced tax rates may apply.
Finance always needs careful checking. Note that 16% VAT and 25%-plus withholding tax usually apply to interest unless it is paid to an Israeli financial institution.
Tax tip: Consider ways of using an Israeli financial institution.
As always, consult experienced tax advisors in each country at an early stage in specific cases.
Leon Harris is a UK/Israeli accountant at Harris Consulting & Tax Ltd. in Ramat Gan. Stuart Harris is a chartered certified accountant at Stuart Harris Associates Ltd. in London.