By NICOLE LEVIN, AVI GURMAN, LEON HARRIS

12/03/2013 21:05

The reform went into effect on August 1 for acquisition tax and will go into effect on January 1 for the

main part of the 

land-appreciation tax.

For the past few months we have been hearing about the new Real Estate Tax Law reform that was published at the beginning of August.

The reform already went into effect on August 1 for acquisition tax and will go into effect on January 1 for the main part of the land-appreciation tax.

It seems that the purpose of the reform is to discourage investors in real estate and to encourage owners of multiple homes to sell their homes, thereby flooding the market with homes and thus bringing down the price of residential real estate. The tax reform is sweeping, and it requires Israeli real-estate professionals to relearn the Real Estate Tax Law.

In this article we will endeavor to explain some of the changes in the law.

First of all, to understand what is different, one must understand what went on before. In every real-estate transaction there are at least two types of taxes.

Land-appreciation tax is paid on the profit from the sale of real estate, and acquisition tax is paid on the acquisition of real estate. Land-appreciation tax is paid by the seller, unless otherwise agreed to by the parties to the contract, and acquisition tax is paid by the purchaser. The tax reform relates to both land-appreciation tax and acquisition tax.

Land-appreciation tax In the past and until this December 31, anyone owning more than one residential home in Israel could sell a home every four years and get an exemption from land-appreciation tax as long as the seller fulfilled certain conditions set out in the law.

Now, as of January 1, an exemption from land-appreciation tax for the sale of residential property will only be given when the home sold is the only home owned by the seller. If the seller owns more than one home at the time of the sale, he will not be entitled to the exemption from land-appreciation tax.

Another change in the law is the limitation of the exemption from land-appreciation tax to the part of the price up to NIS 4.5 million. If the price of the home sold is more than NIS 4.5m., then land-appreciation tax will be levied for the amount of the price above NIS 4.5m.

Under the current (or soon to be previous) law, there was no limitation on the price for which someone could get an exemption. For example, one could sell a home for NIS10 billion and get an exemption from land-appreciation tax if he met with the conditions of the law for this. Another change in the law is the cancellation of the exemption from land-appreciation tax for foreign residents, even if they only own one home in Israel, unless they can prove that they do not own a home in their country of residence.

How this is to be proved is not known, and so it appears that there will be no exemption from the land-appreciation tax for foreign residents. Many countries levy tax on their residents or citizens for the sale of property abroad, and they allow the amount of tax levied in the country where the home is located to be credited against the tax that they charge.

Where this is the case, there is usually no damage to such a foreign resident who will now be forced to pay land-appreciation tax in Israel. However, under the current and soon to be previous law, a foreign resident could get an exemption from the land-appreciation tax if he met the conditions set out under the law for this.

The reform has left exemptions from land-appreciation tax in the following instances: when the home sold is the seller’s only home; when the home sold was inherited; when selling two small homes to buy one larger one; the sale of building rights in a condominium; the sale of residential property inherited by nonprofit organizations. Each of these exemptions is subject to conditions set out in the law It is the policy of the tax authorities not to grant an exemption from land-appreciation tax to foreign residents for homes inherited by them.

Under the previous law, one could give a sibling a gift of a home and not pay land-appreciation tax. Under the reform, this exemption is only allowed when the gift is between parents and children. However, sometimes there may be an exemption from land-appreciation tax from sibling to sibling if the property originally came from the parent.

Under the reform, the exemption from land-appreciation tax that is given for the sale of the single or only home is granted once every 18 months. If in addition to the home being sold the seller owns up to one-third (as opposed to one-fourth under the previous law) of another home, then he will be deemed to own only one home. The tax authorities see a married couple and their minor children as a family unit. So if one person in this unit owns a home and another person in the family unit owns a different home, then each one of them will be deemed to own more than one home and in doing so will not be entitled to the exemption from land-appreciation tax when selling a home.

All is not lost for anyone not entitled to an exemption from land-appreciation tax after January 1, 2014, and until December 31, 2017. For this type of seller there are three magic Hebrew words: shevach reali lineari. The term shevach reali means the actual profit from the sale after all expenses and costs for the purchase and sale of the home are taken into account.

Under the reform, this type of seller will be entitled to a big prize (and we are not being facetious). The actual profit (the shevach reali lineari) earned on the home up to January 1, 2014, may be erased. However, this can be used only twice during the above period on homes acquired before 2014. This can mean possibly no tax or very little tax for the sale of a home even when no exemption is available for the seller.

However, “profit” earned due to the inflation will be taxed.

Each case is different and must be investigated individually to see if the seller can enjoy the benefits set out in the law. It is then critical that owners of multiple homes sit down with Israeli advisers now and do some very careful tax planning.

Acquisition tax The tax reform has brought about changes in acquisition tax as well.

Acquisition tax on property that is not residential has been raised from 5 percent to 6%. Acquisition tax for the purchase of an additional home or acquisition tax for the purchase of a home by a foreign resident is higher than the acquisition tax for the purchase of a home where the purchaser has no other home. The tax has been raised for expensive homes. Ownership of onethird of a home will not be deemed ownership of an additional home.

Again, each case may be different and should be investigated individually. It is clear that careful acquisition tax planning is necessary when purchasing a home as an investment as well.

What tips can we offer? US investors may want to consider using a US LLC (limited liability company) to invest in Israeli real estate. It seems an LLC will only pay 26.5% company tax in Israel on rental income and sale gains, which should be creditable against US taxes.

There are special rules dealing with property acquisition groups; old techniques for avoiding VAT and/or acquisition tax on part of the purchase price have been blocked.

More generally, beware of purchasing groups with 35 or more “offerees” – a full-blown listing prospectus may be needed by law.

Limited partnerships exist in Israel, the US and many other countries; investors get limited liability, but only the general partner can manage the operation.

Tax rates in Israel may range from 25% to 52% (in limited instances), but can usually be credited against taxes in a foreign investor’s home country. Complex rules apply to REITs (Real Estate Investment Trusts).

The above tax reform has set the whole system on its head. It is not yet clear if the results will be worth the chaos such a massive change in the law has caused.

As always, consult experienced tax advisers in each country at an early stage in specific cases.

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Nicole Levin is an American-born, Israeli- trained real-estate attorney. Avi Gurman is an Israeli tax lawyer. Leon Harris is a certified public accountant and international tax specialist at Harris Consulting & Tax Ltd.