Real Estate Taxation – What You Pay, What You Can Save, and Why Tax Planning Before the Transaction Is Worth Tens of Thousands of Shekels

1. Capital gains tax is a tax on the profit from the sale of a property – not on the entire sale price. Its rate may stand at 25% of the real profit, and in certain circumstances higher.
2. A person selling their sole residential apartment is exempt from capital gains tax – but “sole” is precisely defined by law, and conditions such as the holding period and date of acquisition determine whether the exemption applies.
3. Purchase tax is imposed on the buyer – not the seller. Its rate for a sole residential apartment starts at 0% up to a certain amount and increases gradually. For a second apartment and above – the tax rates are significantly higher.
4. Betterment levy – not to be confused with capital gains tax – is a payment to the local authority for the increase in the property’s value resulting from the approval of a building plan, and is usually paid at the time of sale.
5. Spreading capital gains tax backward over the years of ownership of the property can reduce the effective tax rate, as it “distributes” the profit over years in which marginal tax rates may have been lower.

Why Tax Planning Before a Transaction Is Not a Luxury

Many Israelis’ approach to real estate taxation is – we’ll calculate it at the end. This is an expensive mistake. The viability of a real estate transaction depends not only on the purchase or sale price, but also on the “cost” of the taxes attached to it. An investor who purchased an apartment for NIS 1.5 million and sells it for NIS 2.5 million – did not net a profit of one million shekels. Before calculating what remains in hand, one must deduct capital gains tax, renovation costs, commissions, and more. And anyone who did not sell knowing in advance what their tax rate would be – did not manage the transaction, but was tested by it.

The Three Taxes You Need to Know

Capital gains tax is defined in the Land Taxation Law (Appreciation and Acquisition), 5723-1963. It is imposed on the seller and is calculated on the profit from the sale of a right in land – that is, the difference between the sale price and the original purchase price plus recognized expenses. Tax rates on real appreciation generally stand at 25% for an individual.

Purchase tax is imposed on the buyer and is calculated according to the value of the property being purchased. For a sole residential apartment, there is a full exemption up to a threshold currently standing at approximately NIS 1.98 million, and thereafter increasing brackets. For a second apartment and above – the starting rate is 8% and rises to 10%. The difference between a “sole apartment” and a “second apartment” can easily amount to hundreds of thousands of shekels.

Betterment levy is not a state tax but a levy to the local authority. It is calculated on 50% of the increase in the property’s value resulting from the approval of a new building plan (such as an increase in building rights). It is usually collected on the day of sale or the day the building permit is issued. Many investors discover it for the first time at the contract signing stage – when it is already too late to price it in.

Tax Saving Tools the Law Offers

Exemption from capital gains tax on a sole residential apartment – a person selling their sole residential apartment may receive a full exemption from capital gains tax, provided the apartment met the requirements of the law. The exemption is not automatic and is not unlimited – anyone holding a share in another apartment, even a small share, may lose the exemption.

Favorable linear calculation – for properties purchased before January 2014, part of the appreciation accumulated until that date may be exempt from tax, and only the appreciation accumulated thereafter is taxable. The earlier the purchase date – the larger the exempt portion.

Spreading appreciation – according to Section 48A of the Land Taxation Law, the real appreciation may be spread backward over up to four tax years. The spreading does not eliminate the tax but calculates it as if it were generated in equal parts over those years – which may reduce the marginal tax rate, and is particularly beneficial for those who have retired from work and whose annual tax rate is lower.

Deduction of expenses – attorney’s fees, brokerage, renovation and upgrade costs – all of these are recognized expenses that may be deducted in calculating the appreciation. Anyone who did not document the expenses – will not be able to deduct them.

Anecdote: When the Tax Authority Was Found to Be Wrong

In CA 42666-01-20 Chen v. Tax Authority, heard in the Tel Aviv District Court with judgment rendered on May 3, 2024, the Tax Authority maintained an erroneous practice for many years: when calculating capital gains tax for those who sold an apartment they had rented out under the income tax exemption (the exemption track for low rental income below the threshold) – the Authority deducted “notional depreciation” from the acquisition value. This deduction increased the gap between the purchase price and the sale price, and with it – the capital gains tax increased.

The court ruled that the Tax Authority acted unlawfully: anyone who rented out an apartment under the exemption track did not deduct depreciation in practice and could not have deducted it – and therefore there is no justification for deducting it in the capital gains calculation and increasing the tax on top of it. The judge noted that the Authority “took the law into its own hands, collected excess capital gains tax contrary to the legislator’s determination.” The Authority was ordered to refund to the class members – tens of thousands of apartment owners – tax collected in excess, in an estimated total amount of approximately NIS 118 million, which may reach around one billion shekels with linkage and interest. The Authority appealed, and the Supreme Court stayed execution pending resolution of the appeal.

The practical lesson: even a tax assessment that appears “final” by the Tax Authority is subject to appeal – and familiarity with the rules is worth real money.

What to Check Before Signing

Before any purchase transaction – check whether the property will be subject to high purchase tax (are there additional properties?), whether betterment levy applies, and what the net transaction cost is.

Before any sale transaction – check whether capital gains tax exemption applies, what the linear calculation rate is, whether it is worthwhile to spread the appreciation, and which recognized expenses can be deducted.

And before proceeding to sign – ensure that capital gains tax and betterment levy are calculated and incorporated into the price.

Real estate investors, sellers and buyers facing tax exposures before a transaction – it is advisable to examine the situation before a transaction is already on the table.

© Tidhar Tzur Law Firm | This article is for general information only and does not constitute individual legal advice.