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.
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.