I shall begin, actually, from the end: a vacation apartment is not a residential apartment. A vacation apartment does not constitute a residential apartment that is entitled for a Betterment Tax benefit and whoever sells a vacation apartment will be liable to pay the entire sum of land Betterment Tax(Betterment Tax is Capital gains tax on real estate). Anyone who acquires a vacation apartment does not acquire a residential apartment apropos the matter of Purchase Tax (rephrase) but rather a different right. Obviously, there are two sides to this matter, one of the sides is that ….. and the other side is that anyone who owns a vacation apartment is not considered as being the owner of an ‘additional’ apartment in respect to Betterment Tax or in respect to Purchase Tax.
What appears to be trivial, is obviously really not so.
Judgments that were given early last year regarding vacation apartments and taxation on the sale and purchase thereof – as well as cases that were handled by our office – led us to think that we should shed some light on this issue. In addition, the frequent increases in the tax rates on the purchase and sale of apartments as well as uncertainty in terms of taxes on residential apartments and the ownership thereof, makes the matter of residential apartments a very worthwhile channel of investment that should be considered; especially in view of the fact that ownership of a vacation apartment (like all other land rights) does not turn the owners into owner of multiple residential apartments, and tax on the acquisition thereof is 6% from the entire amount, compared with 8% and 10% when purchasing an additional residential apartment.
There are several tax aspects of vacation apartments which require legal reference, amongst which: annual maintenance fees, the use of the vacation apartment, that is, vacation apartments that are used as residential dwellings despite their purpose being as vacation apartments – as in the Herzliya Blue Island affair – and the taxation on vacation apartments when they are being purchased or sold.
This short article shall focus on the taxation when acquiring or selling a vacation apartment.
In Amendment 8 , 5740 - 1980 (hereinafter, the "Amendment"), of the Land Taxation Law (Betterment and Purchase), 5723 – 1963, (hereinafter, the "Law"), the definition was changed with regard to taxation of apartments from a ‘single apartment’ (which serves as the permanent residence of the seller) to a ‘residential apartment’. That is to say, until the amendment there was one law for sale / purchase of a residential apartment for the permanent residence of the seller, and a different and uniform law for the purchase / sale of any rights in land that is not a single apartment. In Amendment No 8 of the Law a different distinction was made: the amendment determines that instead of the definition established in Section 1 of the Law, of a single apartment, the following definition of residential apartment would be used: "an apartment or part of an apartment, the construction of which has been completed, and it is owned or leased by an individual and used for residential purpose, or intended for residential purpose, in accordance with the nature thereof, with the exception of an apartment which constitutes business inventory in respect of Income Tax. " At the same time, Article 9 of the Law from now imposes a different lower rate of Purchase Tax on the purchase of a residential apartment, whether this is the purchase of a single apartment or an additional residential apartment compared with the purchase of different rights in land – in other words, determining an additional new tax bracket and presenting three tax brackets for Purchase Tax: a single residential apartment, a residential apartment and a different right. This is compared with the previous Purchase Tax scale that had two tax brackets only: single residential apartment and a different right.
In addition, Section 49b was replaced by a new section that is an exemption in the sale of a residential apartment and from now on the distinction will be between the sale of a residential apartment (not a single apartment) and between the sale / purchase of a different right. Of course, the Law still refers differently to taxation for a single apartment compared with taxation for an additional apartment, both from the aspect of Purchase Tax and also from the aspect of Betterment Tax – however, in retrospect, with regard to real estate and taxation, Amendment 8 of the Law is particularly noticeable, not only in the context of vacation apartments, but also in light of the fact that this amendment for the first time grants an exemption in Section 49 b (1) –the sale of a residential apartment once every four years regardless of the number of apartments owned by the seller – and with respect to Purchase Tax, imposing a lower rate of tax on the purchase of a residential apartment (though distinguishing between a single apartment and an additional apartment) compared to the purchase of different rights in land.
We also note that in 2014 – 34 years later – as part of the most recent amendments in the Law, that same exemption set forth in Section 49 b (1) of the Law for the sale of a residential apartment that is not the seller’s only residential apartment has been cancelled; subject to the provisions of the Law and in respect of Purchase Tax, the acquisition of a residential apartment is now more expensive.
Purchase Tax and vacation apartments
With regard to our matter, Amendment 8 of the Law (from 1980) and the new concept "residential apartment", provided an incentive for investment in residential apartments since a lower rate of tax was imposed on the purchase thereof, as opposed to the purchase of different rights in land, and this initiated the opportunity for the sale of vacation apartments. Support for this can be found in the extract of land registration of the Tiberias Club Hotel, located at 50 Ahad Ha'am St., in Tiberias, and which is referred to as block 81, in parcel 15041, where one can see that the sale of vacation apartments began in 1981.
Vacation apartment purchases were reported as the acquisition of residential apartments and a declaration by the buyers that they intend to use the apartment for residential use. This benefited the buyers with lower rates of Purchase Tax than on the investment in vacation apartment, versus the acquisition of different rights for real estate such as an office or a store. In other words, what is ostensibly a vacation apartment is an apartment that is designed for residential use by its very nature. As for Betterment Tax, the test is on the actual use that is made (see further details in this regard in the section on Betterment Tax); basically, what is being discussed with regard to Purchase Tax is the future use of the apartment by the buyer according to his declaration on the matter of his intentions.
To put it simple, the wording of Section 1 of the Land Taxation Law which coined a new concept in residential apartment (instead of a single apartment) with regard to the Law, together with Section 9 of the Land Taxation Law, constituted an important lever in the marketing of vacation apartments, since those entrepreneurs offered buyers a real estate investment at a small sum (compared to a residential apartment, a shop or an office) at lower rates of Purchase Tax than the Purchase Tax rates which applied to the purchase of other commercial properties; and what was required from the buyers is a declaration with regard to their intention to reside in the apartment.
Notwithstanding, there is a flip side to the coin which is, of course, that the Purchase Tax is higher on the acquisition of other residential apartments. We will take a case in which a couple have a residential apartment in which they reside, as well as a vacation apartment.
The couple wish to sell their residential apartment and purchase a different apartment instead. If the vacation apartment is not considered as being a residential apartment then the couple have one residential apartment and in such an instance they will pay Purchase Tax according to which the tax of the single apartment is tax-bracketed with a commitment to sell the other apartment (their present residential apartment) within two years or, in the case of purchasing from a contractor, within the time period prescribed by Law.
Nonetheless, if the vacation apartment is indeed considered a residential apartment then the acquisition of a new residence instead of this current one will be charged with Purchase Tax according to the tax bracket for a residential apartment, which is higher.
In the case that was represented by our firm a customer of the firm had owned one residential apartment which he sold, and purchased another one instead of it. The self-purchase tax assessment that was conducted for the customer was in accordance with a single residential apartment; however the Land Taxation Office perceived the vacation apartment that the client purchased in the Club Hotel in Tiberias as being a residential apartment and determined the Purchase Tax assessment in accordance with that for a residential apartment. In this instance the difference amounted to approximately NIS 90,000. A written appeal was submitted, and was accepted, and the assessment was amended in accordance with the self-assessment (see, provisions for the execution of land taxation 5/2010 in the endnotes).
In this regard it is important to clarify that also the ruling on the subject at the relevant time (during the 1980s), and also the current ruling determines that a vacation apartment is not considered as being a residential apartment for purposes of Purchase Tax.
In an Appeal on the matter of Betterment Tax (Various Requests) 22/89 Mandel vs. the Land Betterment Tax Director District Court Ruling 5751 (2) (1991) it was decided that a vacation apartment where the appellants lived two months out of the year and the remainder of the time the apartment was rented by the management company to the general public for short periods does not constitute a residential apartment as defined in section 9 of the Income Tax Law and the Purchase Tax Regulations and they were required to pay Purchase Tax for the acquisition of land rights. Also in Civil Appeal 4299/11 Gitzelter vs the Land Betterment Tax Director which was handed down on 21.1.2014, it was once again determined that a vacation apartment does not constitute a residential apartment in respect of the matter of Purchase Tax Regulations.
The Gitzelter judgment above constitutes an important component as well as the Hakim judgment (see below) and it is the adaptation of the apartment for residential purposes from the aspect of the Urban Building Plan and the license. The emphasis on the planning situation, which commenced with the Blue Island affair, actually makes the test for determining the relevant Purchase Tax more objective. That is to say, currently the intention of the purchaser is required to integrate into the planning option for permanent residence. Even if the buyer's intention is to reside in the residential apartment on a permanent basis, the apartment needs as well to be designed for permanent residence and not for the purpose of vacation, in accordance with the Urban Building Plan.
Incidentally, the acquisition itself took place in 2006. If the acquisition would have been made today it is possible that the appellants would be claiming that this is the acquisition of ‘different rights’ in light of the change in the tax bracket in respect of Purchase Tax on an additional apartment.
It therefore follows that a vacation apartment is not a residential apartment even though it contains the characteristics of a residence and, in effect, is used for the purpose of residence; however it is used for short-term temporary accommodation, and the definition of the term is that it is not used for permanent residence but is rather a vacation accommodation.
Betterment Tax on the sale of vacation apartments
The simple and self-evident assumption that vacation apartments are not residential apartments is not a negligible thing when referring to Betterment Tax.
Civil Appeal Request 5764/95 Betterment Tax Director vs Yitzchak Zota determined that a vacation apartment in respect of Betterment Tax shall be treated as a residential apartment since it is an apartment which is designed for residential purposes according to its very nature and, therefore, in that case exemption was granted in respect of the sale of the apartment and the appeal of the Betterment Tax Director was rejected. In this case the sale in question was made in accordance with Amendment 34 of the Law in which the term of "residential apartment tax benefit entitlement" was coined, which also examines the use that is made of the apartment.
Ostensibly, Amendment 34 of the Law and coining the term "residential apartment tax benefit entitlement" and its amendment by Amendment 36 of the Law was supposed to provide response for the tax authorities and to establish for them the option of requiring Betterment Tax on the sale of a vacation apartment. But then, as stated ostensibly, in Administrative Application Appeal 2273/03 Blue Island General Partnership vs Society for the Protection of Nature et al which was handed down in 2006, a contradictory instance is discussed. Purchasers of apartments that were intended for vacation used same for residential purposes, contrary to the Urban Building Plan, and in the sale of the apartments they hoped to benefit from exemption for the sale of residential apartments. The Court ruled that the term " tax benefit entitlement " is in addition to the term "residential apartment" – in other words, that the apartment that is intended for residential purposes in accordance with the very nature thereof, and the objective test for that is the designation of the property in accordance with the Urban Building Plan and the construction license, and if the apartment did not fulfill this then, even if in actual fact use of it was made for residence and not for vacation, as instructed in the Articles of the plan, then the matter under discussion is not the sale of a residential apartment entitlement which complies with the conditions of an exemption from Betterment Tax. These things are not new and were stated in Civil Appeal 237/87 Golan vs the Central Lands Betterment Tax Director, Judgment 44 (3) and in the book by the scholar Yitzhak Hadari - Land Taxation Vol. A 419 (second edition, 2000)
Moreover, in this case, provision of an exemption from Betterment Tax in the sale of such apartments is equal to an award. A situation has arisen of miscarriage of justice in which the sellers of the apartments who made illicit use of the vacation apartments for residential use will be eligible to benefit from the exemption, compared with the purchasers of vacation apartments who upheld the Law and did not make illicit use of the apartments for permanent residence, in contradiction with the Urban Building Plan and therefore they are not eligible for exemption. In other words, provision of exemption from Betterment Tax in respect of the sale of vacation apartments constitutes also here an incentive to break the Law and use the apartment illicitly for permanent residence.
In Civil Appeal 1046/12 Hakim vs Land Taxation Director Netanya issued on 21.01.2014, wherein the Court seeked to rule on the matter of vacation apartments and clarify, once and for all, that also from the aspect of Betterment Tax the sale of a vacation apartment is not the same as the sale of a residential apartment. In this instance, the matter in question was in respect of a purchase made after judgment with regard to the Blue Island affair, and it was sold with an application for exemption from Betterment Tax for the sale of the apartment. The Supreme Court ruled that the sale is not the sale of a residential apartment and it may not receive exemptions from payment of Betterment Tax for the sale thereof, since as a vacation apartment it is not permitted for permanent residence due to its designation, from the planning aspect, and therefore there is no potential for permanent residence. Even if the negation of potential for permanent residence is denied "only" legally, and not physically, this is not enough in order to detract from or alter the simple fact that one cannot reside permanently in a vacation apartment (further details relating to the judgment can be found in the endnotes
It should furthermore be stated that Messrs Hakim signed a declaration in accordance with which they are aware of the judgment handed down in the Blue Island Affair and that the apartment is a vacation apartment designed to fulfill use by the public in accordance with the Urban Building Plan and the construction permit for most days of the year and that they will be prevented from claiming otherwise.
In conclusion, as we said initially, a vacation apartment is not a residential apartment. This determination is both positive and negative. While the prices of residential apartments are soaring, and the Purchase Tax thereon is also liable to rise by the rate of the acquisition of different rights (8% - 10% on the purchase of an additional apartment compared with 6% on the entire amount for the purchase of different rights in land (such as vacation apartments) and Betterment Tax levied on the sale of a residential apartment (which is not a single apartment ) that was acquired after 01/01/2015 is as high as 25% – vacation apartments have again become a more attractive investment channel when the purchase thereof will not prevent the owners of a single apartment exemption from Betterment Tax for the sale of their residential apartment.
The foregoing does not constitute a legal opinion, nor does the above stated constitute a substitute for specific legal advice.
Copyright - Omer Rottenberg, Adv.
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[i] The Supreme Court in its judgment refers, inter alia, to Civil Appeal 2170/03 Schechner vs Land Betterment Tax Director, Judgment 59 (2) 250 (2004), in which the then President of the Supreme Court, Prof. Aharon Barak, clarified that the objective test is not a narrow test that examines the existence or absence of physical facilities only, but it includes additional objective components such as the location of the property and its surroundings, the nature of the property, the building plan of the property which can also be used to examine whether the property is used for residential purposes according to its very nature – in other words, in accordance with that same objective test.
The Court also emphasizes the fact that the purpose of the exemption from Betterment Tax on sale is social and societal, and is intended primarily in order to enable people to improve the conditions of their permanent residence without being required to pay tax on this, while referring in this respect to the statements of Judge Vitkon in Civil Appeal 262/65 Land Betterment Tax Director Tel Aviv vs Tamir, Judgment 20 (1) 659, 698 (1966) according to which the legislator wanted to revoke the exemption on a temporary apartment, such as a summer residence and so on. According to the Honorable Court, these basic intentions of the legislator did not change.