Six Real Estate Taxes You Need To Know About
If you’re involved in real estate transactions, whether buying, selling or renting, you need to know about any taxes you may be required to pay. Here’s an overview of the main real estate taxes.
Capital Gains Tax (Mas Shevach)
If you’re selling a house, apartment, land, store, office or any other real estate you may need to pay capital gains tax. This is a tax on any profits you make as a result of selling your property.
If you’re selling land or commercial property you cannot claim an exemption from capital gains tax. However, if you’re selling a residential apartment you may be exempt from paying capital gains tax under certain conditions. For example, you may be exempt if you used the apartment for residential purposes and have not sold an apartment during the last four years (if you own more than one apartment) or during the last 18 months (if this is your only apartment).
Before you sell an apartment it’s prudent to consult with a real estate lawyer about your capital gains tax situation, including whether or not you are eligible for an exemption and how this sale may affect any exemptions you may be eligible for on future sales of other property.
In order to register the rights in the apartment in the name of the purchaser, the capital gains tax must be paid or the exemption must be issued. For this reason it may be necessary to leave money in escrow until the capital gains tax is accounted for.
Sales Tax (Mas Mechira)
Sales tax applies to commercial property, or to residential property where the owner deals in the sale of residential property as a business. It does not apply to the sale of residential property by individuals for whom real estate is not a business. Sales tax is calculated at 2.5% of the price of the property, irrespective of whether the property was sold at a profit or loss. However, in some situations the seller may receive a partial exemption and pay only 0.9%.
Purchase Tax (Mas Rechisha)
Purchase tax is paid by the purchaser in any land transaction. It must be paid within 50 days of signing the contract or a fine may be incurred. The tax is a percentage of the price, calculated on a sliding scale. The scale is updated every three months.
In certain cases, purchasers may be eligible for a partial exemption from purchase tax. For example, new immigrants (olim chadashim) receive a partial exemption, as do buyers who purchase an apartment as foreign residents and subsequently make aliya within a year of the purchase. In the latter case, purchasers receive a refund of a portion of the purchase tax paid. If you made aliya before purchasing your apartment you are eligible to receive the partial exemption within 7 years of making aliya.
A partial exemption is also available when a person receives an apartment as a gift from a family member. In this case the person receiving the apartment pays 1/3 of what the tax would have been in a regular transaction. However, if the person purchases an additional apartment without selling the present one, the purchase tax is higher than usual.
The property cannot be registered in the buyer’s name until the purchase tax has been paid.
Betterment Tax (Hetel Hashbacha)
This is a tax paid when the authorities allow a change of zoning for a neighborhood which causes the value of the property to rise. The tax is 50% of the added value to the property (as assessed by an assessor) due to the change in the zoning.
An example of betterment tax levied is when agricultural land is changed to residential land. Another example is when the building rights to a house or building are increased, allowing the owner to build an addition to the house.
The betterment tax is paid when the owner sells the property or when he requests a building permit. If you are considering purchasing a property, your lawyer should address the existence of betterment tax within the framework of the transaction in order not to delay the registration of the property in the your name. Your lawyer should also check whether there are any plans to change the zoning which might cause you to incur betterment tax in the future.
Municipal Taxes (Arnona)
This is a tax that is paid to the local municipality for the property. It is paid once every two months but can also be paid for the whole year in advance. There are some instances where full or partial exemptions are given. For example, new immigrants receive an exemption from municipal taxes for the first year. Senior citizens are given a discount. Other groups such as low income families can also get discounts.
If the municipal taxes have not been paid the apartment cannot be registered in the name of the purchaser so, again, it is essential that this is checked and addressed within the framework of the real estate transaction.
Income Tax On Rent
The Israeli Income Tax Authorities charges income tax on rent received by a landlord. In residential properties, the first $900 a month is exempt from income tax. Any amount above $900 a month is taxable.
A landlord can select how the income tax is calculated from one of the following three methods:
- 10% of the income including the first $900 a month.
- 30% of all the income including the first $900 a month minus recognized expenses which can be deducted.
- 30% of the amount above $900 a month multiplied by two. You should have your accountant crunch the numbers in order to see which method is best in your situation.
Rents on commercial properties are taxed at a rate of 30% of the income (including the first $900 a month) minus recognized deductible expenses.
This article offers a general overview of real estate taxes. The information included in the article can be subject to change. Always consult your real estate attorney or accountant in Israel to help you calculate the taxes and any exemptions you may be entitled to.