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Betterment Tax for foreign residents on the sale of an entitled residential apartment, in light of the reform in the Land Taxation Law
In my previous article I reviewed the recent major changes in the Land Taxation Law (Betterment and Purchase), 5723 – 1963 (hereinafter: the "Land Taxation Law"), regarding the purchase tax that will apply to foreign residents.
Significant and broad changes apply with regard to the grounds for exemption from the payment of betterment tax on the sale of a residential apartment, which is an entitled to a tax exemption. Some of the changes apply equally to Israeli residents and foreign residents, on the one hand (also on the purchase of an apartment) ; but on the other hand some of these changes also result in preferential treatment for individual sellers of an apartment in Israel over foreign residents. The changes in the Land Taxation Law with regard to the sale of an entitled residential apartment came into effect on January 1, 2014.
The purpose of this short article is to briefly clarify the key changes that have taken place in land taxation on the sale of residential apartments in Israel in respect of foreign residents.
In addition, as part of the reform, a definition with regard to the sale has been established in respect of the fifth Chapter 1 of the Land Taxation Law whereby only an Israeli resident or a foreign resident who does not own a residential apartment in the country in which he resides is entitled to benefit from exemption in accordance with this section. Moreover, the sum of the sale exempt from taxation is now limited. That is to say: in principle and subject to the provisions of the Land Taxation Law, from now on exemptions will be given from the payment of betterment tax only to anyone selling the only residential apartment that they own, on the condition that it was owned (whether by himself or whether it was leased) for a period of at least 18 months, and on the condition that he is an Israeli resident (or a foreign resident that does not own a residential apartment in the country in which he resides).
Part B – the sale of an inherited apartment
The Article says:
" The sale is of an entitled residential apartment that the seller received as an inheritance, provided that the following conditions are fulfilled:
[Land Taxation Law (Betterment and Purchase), 5723 – 1963, published in LawData]
In other words, the cumulative conditions are that the seller shall be one of the close relatives of the testator as aforesaid in subsection (a); prior to his death, the testator was the owner of only one residential apartment and if the testator would have sold it he would have been entitled to a tax exemption on the sale.
We will examine how this affects foreign residents and their relatives;
Firstly, and especially when dealing with foreign residents, the question arises of whether the term "seller" is as defined in the definitions of the fifth Chapter 1 of the Land Taxation Law – an Israeli resident or a foreign resident who does not own a residential apartment in the country in which he is a resident. That is to say, if the term the ‘seller’ here is as this is defined in the aforesaid fifth Chapter 1, then the exemption on the sale of an inherited apartment will be granted only to Israeli residents or foreign residents who do not own a residential apartment in their country of residence. Otherwise – and for the purposes of exemption on the sale of an apartment that he received by inheritance – a seller is any seller whatsoever, and not necessarily in accordance with the definition of “seller” as stated in the fifth Chapter (1) of the Law; in such instance the question of residency is irrelevant in terms of the identity of the seller.
We can understand what is involved:
In one instance the testator is a resident of Israel and is the owner of one residential apartment , and he bequeathed his apartment to his child – a foreign resident who owns an apartment in his country of residence. In this instance, although seemingly the testator complies with the conditions of the clause, the seller – the recipient of the inheritance – shall not be entitled to an exemption because he (the seller) is a foreign resident who owns an apartment in his country of residence and therefore will not be entitled to sell the apartment with this exemption.
Another instance is an instance in which the testator is a foreign resident who owns an apartment in his country of residence. In addition, the testator had one apartment in Israel prior to his death and he bequeathed it to his child who is a resident of Israel. Inthis case the inheritor is a relative of the testator and the testator did, in fact, own one residential apartment on the eve of his death; however, if he would have sold it at the present time he would not be entitled to an exemption for the sale and therefore, it is not possible to take advantage of this exemption and the seller will be required to take advantage of his own personal exemption if it is his only apartment.
Moreover, the reform in the Land Taxation Law also determined in the law of owning a single apartment – Article 49 C of the Law, which says the following:
"For the purposes of Article 49b (2), the apartment being sold shall be deemed as the only residential apartment unit owned by the seller even if he has, in addition to the apartment being sold, another residential apartment to which any of the following apply:
(Land Taxation Law (Betterment and Purchase), 5723 – 1963.published in LawData)
That is to say, a situation in which the seller owns one residential apartment and he receives an apartment through inheritance from the testator who owned several apartments – then receiving the apartment through inheritance will prevent him from also selling his apartment with an exemption from betterment tax as it would be considered as multiple residential apartments in accordance with this definition; and also the sale of the inheritance apartment will be taxed at the time of sale. This is true both for foreign residents and for Israeli residents.
It is clarified and emphasized that there are additional grounds in the Land Taxation Law for exemption from payment of betterment tax on the sale of a residential apartment, but this article does not deal with them and / or their applicability to foreign residents.
An example of calculation in accordance with the new linear method:
Eitan owns several apartments and is considered to be a multiple-apartment owner; he wishes to sell his apartment on Dizengoff Street in Tel Aviv. The apartment was purchased by him on 1.1.2005 at a price of NIS 1,000,000 and he is selling it on 1.1.2015 at a price of NIS 2,000,000. The new linear calculation is done using the following method: the purchase price should be linked to the index until the date of sale. For example, suppose the adjusted purchase price as at 1.1.2015 is NIS 1,300,000, and we will also not take into account the permitted expenses deductible under Article 39 of the Law [betterment fees, purchase tax, legal fees, brokerage fees, investment in the property (subject the provisions of the Law), etc.]. That is to say, the betterment for the entire period is: NIS 2,000,000 less NIS 1,300,000 = NIS 700,000. The cumulative betterment is divided by the number of years the apartment was owned – 10 years, resulting in a sum of NIS 70,000 annual betterment. The annual betterment is multiplied by the number of taxable years of ownership commencing on 1.1.2014 ; in this case – only one year, and amounts to a sum of NIS 70,000. The resulting sum – NIS 70,000 – is the result of multiplying the number of years of annual betterment by the number of years of taxable ownership multiplied by 25% resulting in a sum of NIS 17,500, which is then the sum of betterment tax to be paid.
To better understand we will use that same example but this time the acquisition date will be 1.1.2006 and the date of sale will be 1.1.2016. Apart from that, the remaining data are identical. In this case we still attain a sum of NIS 70,000 in annual betterment tax, but this time the number of taxable years commencing on 1.1.2014 is two years and therefore the calculation will be 70,000 x 2 x 25% = NIS 35,000 as the sum of betterment tax to be paid.
To complete the picture, a reservation should be made and let us say that in the case of sale of an apartment that was rented, depreciation that could be deducted to the full extent should be taken into account, which affects the adjusted purchase price. Furthermore, let us add that in the case of an apartment being sold which was purchased prior to 1994 we must take into account the addition for payment of the tax for the inflationary betterment tax as specified in the Law. Moreover, we are referring to the sale of an apartment the payment for which is not affected by unused building rights.
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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