If you are a serious investor, tax is a cost like any other cost to be contained as far as reasonably possible.
The Israeli real-estate market is booming at present. If you are a serious investor, tax is a cost like any other cost to be contained as far as reasonably possible. And foreign investors in Israeli real estate will want to minimize taxes in both Israel and their country of residence.
Therefore you need to plan with tax advisers in each country:
1. Entities: company, partnership, trust, REIT.
2. Transactions: regular trading, long-term leasing, etc.
3. Finance: local or international.
4. Avoiding double taxation: credit for Israeli tax against tax in the home country.
Israel‘s 50 tax treaties help, but only partly. Consider not only income tax but also acquisition taxes, betterment taxes, VAT, capital-gains tax, inheritance tax, etc.
2011 ISRAELI REFORM
Israel has reformed its real-estate tax procedures. The buyer may now get title after paying 40 percent of the consideration to the seller and a withholding tax of 15% (or 7.5% if the seller bought before November 7, 2001). No withholding tax applies if you buy from a recognized builder with Tax Form 50. Taxes are reportable within 40 days and payable within 60 days. Separately, local mortgages rules are being tightened.
Israel imposes an acquisition tax of up to 7%.
Tip: There are reductions for homes for new immigrants and those with no other home in Israel.
Big profits are possible if agricultural land is rezoned as available for construction. Permission is needed from various bodies. You may have to forfeit part for roads, etc. A betterment levy (typically 50% of assessed amount) and other fees will apply.
Tip: Much Israeli land is held on a 49-year lease from the Israel Lands Authority. If the holder‘s time is up, consider renewing the lease with future rezoning ability.
If this is for you, there is a lot to check. Construction can be for own occupation, renting out, sale or service to others.
Check if this is a business activity having regard to your expertise and frequency of dealings in real estate.
1. Businesses can sometimes recover VAT on expenditure (16%) unless the construction is for residential rental.
2. Long-term construction projects (over one year) for customers are taxed in Israel only after 25% completion by value or quantity, at your option, is reached.
3 Non-business status can sometimes reduce Israeli income tax on rental income.
4. Businesses and non-businesses can claim Israeli depreciation and finance expenses, subject to conditions.
Private landlords of Israeli homes can choose between:
1. No Israeli income tax if total monthly rental income is less than NIS 4,790.
2. Israeli tax at 10% on gross rental income, due by January 30, regarding each preceding calendar year.
3. Israeli tax at regular rates on rental income net of expenses, depreciation and mortgage interest.
1. Depreciation is on the building element, not 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 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).
2. Regular Israeli individual tax rates range up to 45% in 2011.
National Insurance Institute payments also apply at various rates but are minimal for foreign residents.
3. Companies pay Israeli company tax at a rate of 24% in 2011. Dividends are taxed in Israel at 20%-25% usually, subject to any treaty.
4. Israeli tax breaks are available for long-term residential-commercial rental projects. These tax breaks may be protected from home-country tax under special rules in a few tax treaties; e.g., the UK-Israel tax treaty.
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. In the case of ‘‘TAMA 38‘‘ anti-earthquake projects, the taxable event is postponed until conditions are fulfilled or the option is exercised.
Companies generally pay 25% tax, individuals 20% if the real estate asset was acquired after November 7, 2001.
Tip: Individuals are exempt from LAT on Israeli home sales in various cases, including:
* After an 18-month waiting period following a previous exempt sale, if they only own one home in Israel.
* After a four-year waiting period following a previous exempt sale, if they own more than one home in Israel.
* In 2011-2012, two more home sales are exempt if the sale price is no more than NIS 2.2 million. Above that, a pro rata exemption applies.
* It doesn‘t matter where the seller resides, or what other properties the seller has, outside Israel.
* For assets acquired in 1961 or earlier, special reduced tax rates may apply.
Needs careful checking. Note that 16% VAT and 25% withholding tax usually apply to interest unless it is paid to an Israeli financial institution.
Tip: Consider routing non-Israeli finance through an Israeli financial institution.
The above is extremely general and brief. You should consult Israeli property specialists (engineers, etc.) as well as legal and tax advisers in each country.
Leon Harris is an Israeli CPA and tax specialist at Harris Consulting & Tax Ltd.