When selling a residential property, the seller is obligated to pay capital gains tax.
This tax applies to the profit of the seller in the sale of the apartment, that is, the difference between the amount paid by the seller when he purchased the apartment and the amount received by the seller when selling the apartment. This difference is called “the Capital Gain“.
The law provides some possible exemptions of capital gains tax for apartment sellers.
In 2013, the law was amended dramatically, and the system of exemptions of capital gains tax applicable to the seller of a residential apartment changed. In order to implement the provisions of the Amendment gradually, “transitional provisions” were legislated. The “transitional provisions” came into effect from January 1, 2014, to December 31, 2017. This period is called “the Transition Period“.
The amendment determined, inter alia, that in the Transition Period a new linear tax rate will be applied in the sale of residential apartments purchased prior to the beginning of the Transition Period (Before January 1, 2014).
According to the new linear tax rate, the seller of a residential apartment will pay a tax of 0% on the Capital Gain which was accumulated from the date of purchase of the apartment until December 31, 2013, and the capital gain which was accumulated from January 1, 2017 until the sale of the apartment will be taxed at the rate of 25%.
There are two limitations on applying the new linear tax rate when selling a residential apartment:
- The calculation of the capital gains tax on real estate can be obtained according to the new linear tax on the sale of only two eligible apartments during the Transition Period.
- The new linear tax may be applied to the second transaction during the Transition Period, only in the event that four years have passed since the seller sold an apartment by using a tax exemption.
With the end of the Transition Period and the beginning of the Permanent Period (commencing on January 1, 2018), some significant changes occurred in the restrictions applying to the new linear tax rate:
- The restriction on the number of apartments that can be sold at the new linear tax rate was canceled – the new linear tax rate will apply to every eligible apartment that was purchased prior to the transition day (before January 1, 2014). There will not be any limitation on the number of apartments that can be sold at this tax rate.
- Sale of part or all of the rights in a residential apartment – the second limitation on the application of the new linear tax rate at the time of the sale of residential apartment requires that the seller sold all his rights in the apartment. Therefore, during the Transition Period, it was not clear whether the new linear tax rate also applied to those who sold only part of their rights in the apartment. With the end of the Transition Period and the beginning of the Permanent Period, Amendment 76 indicates that the new linear tax rate can also be applied when selling part of the rights in the apartment.
- Sale to a relative – during the Transition Period the new linear tax rate could not be applied when selling an apartment to a relative. With the beginning of the Permanent Period, the new linear tax rate can be applied to the sale to a relative.
In addition to the new linear tax rate and the removal of the limitations on the use of this tax rate during the Transition Period, with the beginning of the Permanent Period additional changes in the taxation of residential apartments were entered into force:
Additional Changed in the Taxation of Residential Apartments you should know:
- Exemption in the sale of a single apartment – section 49b(2) of the Real Estate Taxation Law determines an exemption that can be used when selling a single residential apartment. This exemption was granted during the Transition Period only to a seller who did not own more than one apartment on January 1, 2014. As of 2018, the number of apartments owned by the seller will be counted only on the date of the sale. In other words, the exemption will be granted to anyone who owns only one residential apartment at the time of the sale and meets the other conditions of the exemption.
- Cancelation of a cooling-off period in the sale of an apartment received as a gift – before the legislation of Amendment 76 and during the Transition Period, the law required a cooling-off period between the date of receiving the apartment as a gift and the date of sale of that apartment by using the linear tax rate. As of 2018 and during the Permanent Period there is no restriction on the sale of an apartment received as a gift in linearity. In other words, the new linear tax rate can be applied to the sale of the apartment even without a cooling-off period.
- An exemption applied on the sale of two cheap apartments against the purchase of one more expensive apartment (section 49e of the Real Estate Taxation Law) – as mentioned above, during the Transition Period there was a restriction on the use of an exemption in the sale of a single apartment. The exemption was granted only to a seller who did not own more than one apartment on January 1, 2014. With the removal of this restriction, this exemption can be used more easily.
- Termination of a temporary order for Amendment 78 – Amendment 78 provided a temporary order enabling the buyer to pay an advance payment equal to the amount of the tax according to the seller’s self-assessment until January 1, 2018. With the end of the temporary order this relief was canceled, and now the buyer is required to pay an advance payment on the seller’s tax at the rate of 7.5% or 15% of the value of the sale in order to obtain a capital gain tax certificate. However, a request can be made to reduce the advance payment amount that will be given at the discretion of the capital gain tax on real estate administration in accordance with the law. In order to protect your interests, it is recommended to anchor this option in the sale agreement.
This article provides general and preliminary information only and should not be construed in any event as legal counseling and/or as a substitute for legal counseling in respect of any case and its circumstances.
The above should not be relied upon without consulting with an Israeli lawyer before taking any action or making any decision. The above is true as of the date of its composition, and its veracity may change from time to time.
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