The main points of Amendment 76 to the Real Estate Tax Act (full article)

  1. Amendment 76 of the Real Estate Tax Act (acquisition and improvement) - 1963 (hereinafter, "the Act") has significantly narrowed the range of tax exemption on real estate improvement when selling a residential apartment.
  2. Most of the changes are as follows: 2.1. As of the 1st of January 2014 (except in certain exceptional situations) our clients who are foreign residents will no longer enjoy any tax exemption. 2.2. As of 1 January 2014, our clients who are Israeli residents who own more than one dwelling apartment, no longer enjoy an exemption from Betterment Tax (which till now allowed a single exemption therefrom as to the sale of an apartment once every four years). It was replaced by a new regime, which imposes a reduced tax called, "Optimal Tax Rate." The effective rate is between 0% to 25%, which is determined according to certain criteria. It has a transition period that started on 1 January 2014 and will end on 31 December 2017, during which period such owner may only sell two dwelling apartments, provided a certain conditions are met in regard to each purchaser; note, that an apartment received as a gift is excluded from the scheme and is subject to a full payment of the tax. The sale of a dwelling apartment (during the transition period, 2014-2017), in derogation of the criteria that entitle one to utilize the Optimal Tax Rate, may result in a payment of up to 42% of the actual improvement in value (a form of capital gain tax applied to real estate's improvements), imposed on the adjusted increase in value of the apartment; and, in addition, such a seller will be subjected to a payment of 10% of the in the inflationary (unadjusted) increase in value of the apartment. 2.3. Our clients who are foreign residents, who own more than a single dwelling apartment, will also be subjected to the Optimal Tax Rate during the transition period, according to the same criteria set for Israeli residents (supra). 2.4. Commencing on 1 January 2018, a resident of Israel or a foreign one, who owns more than a single dwelling apartment in Israel will be subjected to a reduced betterment tax on the sale of any dwelling apartment. The tax rate will be between 2% - 25%, depending on the length of time the seller has owned the place. The rate decreases in direct relations to the length of time the seller has owned the apartment. Such dwelling units purchased after the 1st of January 2014 will be subjected to a 25% betterment tax – i.e., on the adjusted increase in the apartment's value. 2.5 In addition, a ceiling was set for luxury apartments (sold for over NIS4.5 million). Any amount received by the seller over NIS4.5 million will not be entitled to the reduced rate, and will be the object of a 42% improvement tax – i.e., on the adjusted increase in the dwelling's value.
  3. As to our clients who are Israeli residents and who own a single apartment, the exemption from betterment tax remains in effect, subject to certain conditions, whose presence or absence has to be determine individually. Here is the place to mention, that the exemption at issue may be used once every 18 months (not systematically however, to avoid being considered one engaged in the business of selling apartments). Here, too, there is a ceiling of NIS4.5 million, and any amount received in such a sale that exceeds the ceiling is taxable at the full rate of 42%.
  4. Another significant change in the legal scheme occurred as a result of the elimination of the exemption from betterment tax on a transfer by way of a gift between siblings, except when such gift was conveyed to the donor by a will, or was gift, from a grandparent. This amendment has been in effect since the 1st of August 2013.
  5. Modifications Affecting Purchase Tax 5.1 In relation to purchase tax, the definition of the term "single apartment" was amended, so that now a dwelling will be considered as such, even if the purchaser, in addition to it, owns not more than one-third of another such place of residence. 5.2 Starting on the 1st of August 2013, and until the 31st of December 2014, two additional tax brackets will be added to the taxation scheme of luxury apartments: 5.2.1. That part of the value of the apartment that is between NIS4,500,001 to NIS15 million will be assessed a purchase tax of 8% of that amount. 5.2.2. That part of the value of the apartment that is valued NIS15 million and above be assessed a purchase tax of 10% of that amount. 5.3 Raising the rate of taxing the right to purchase land (option), acquired for non-residential purpose, was raised to 6% and a mechanism was created for the recovery of 1% (1/6), according to certain conditions set therein.
  6. Purchase tax regarding the allocation of rights in a real estate association. As of the 1st of August 2013, a purchase of allocation rights in a real estate association will be assessed a purchase tax in accordance with the provisions of the law. Whoever had been allotted such rights shall be required to report it and pay purchase tax.
  7. Notional sale in distribution of revaluation gains. A new directive was added to the existing legal provision, corresponding to the Income Tax Ordinance, which provides that the notional sale and purchase of real estate rights or rights in a real estate association, that entails distribution of revaluation gains. This provision's meaning is: The directive shall apply to the distribution of revaluation profits, amounting to over one million NIS, to be calculated cumulatively from date of the property's purchase. 7.2. The distributing company will be obligated to report a "self-assessment" due to such sale within 40 days thereof and/or any following action concerning a real estate association (resulting in such revaluation) and make z tax payment on the improvement (gain) derived therefrom. 7.3. At the time of the notional sale, as stated, a purchase tax liability did not arise. 7.4. This provision came into effect as of the 1st of August 2013, however, to the best of our understanding, in the absence of a determination by the Minister of Finance as to which fraction will not be liable for corporate tax, this provision has not, as of yet, become operational, but the determination may be applied retroactively once the finance minister makes a determination.
  8. These are the main alterations that will, necessarily, affect many of our clients. However, there are numerous other changes and nuances in the new law, and this brief summary is no substitute for proper, detailed legal advice, which may be useful before making a decision to sell a residential apartment or any real estate asset you may own. Corporations Incorporation, Formation of Partnerships and Counterparts – Incorporation, formation of non-profits, public purpose companies and partnerships (both registered and unregistered) while providing constant, hands-on support, advanced analysis of up and coming needs of corporate entities when the corporate entity is classified and publicly registered. Preparation and Amendment of Articles of Incorporation/Memoranda of Association – preparing articles of incorporation that meet the needs of the incorporators, while paying particular attention to the nature of the corporation, the goals of the incorporators, the corporation's capital, the rights granted to a shareholder, the structure of the corporation, the arrangement of shares distribution, the corporate officers and legal issues attendant corporate activities. Preparation of Corporate Agreements – Phrasing and drafting various agreements, such as incorporators' agreements, purchase and sale agreements, financing and loan agreements, engagement agreements with various service providers, employment agreements and cooperation agreements. General Corporate Advice – Providing advice on regular basis to corporations in the areas of commercial law, corporate management law, corporate officers conduct, shares distribution, dividends distribution, engagements with service providers, filing reports with the Registrar of Companies, Registrar of Non-profit Organizations, Registrar of Pledges and all other such regulatory bodies. Advice to Directors and Officers – individual, detailed counseling provided to corporate officers, drafting opinions and other documents regarding corporate activity
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