If you’re thinking of buying an apartment in Israel, you’ve probably discovered that you’ll have to pay purchase tax. The amount of tax you’ll have to pay, varies greatly depending on the buyer. The tax groupings can be divided as follows:
Buying an apartment for investment
Buying an apartment for residential purposes
When buying an apartment for investment, you pay 5% tax from the first shekel, whilst when buying an apartment for residential purposes, you start paying 3.5% tax from just over NIS 1.7 million. for example: If you are buying an apartment for 2,000,000 Shekel as an investment, you will need to pay 107,000 Shekels as purchase tax. If a family that does not own another apartment will buy the same apartment they will only need to pay 8,800 shekels as purchase tax. So what is the reason for this 100,000 shekel difference?
The logic behind the division
The basic purpose behind purchase tax is to allow the state to make more money from the real estate market. Over and above the ability to make a profit, there is an opportunity to give families looking for a home advantage over investors whose purpose is purely economic.
Although the state makes money from purchase tax, when it gets too high it starts to lose. This is because investors then choose to invest abroad. Therefore, at the height of the Corona crisis when the state needed the money it actually lowered the purchase tax for investors.
What dictates whether the apartment is for investment or residence?
It can be said that each apartment is considered an investment apartment unless the buyer meets the following conditions.
A. He is a resident of Israel: regardless of the question of citizenship, an American citizen living in Israel will be considered a resident, while an Israeli citizen living in America will not be considered a resident. In order to be considered a resident, you must spend in the country at least 6 months of the year, for two consecutive years.
B. This is the only apartment that belongs to the buyer. If the buyer intends to sell his additional apartment within 18 months, the apartment will be considered a single residential apartment.
When the buyer does not meet the above two conditions, the purchase will be considered a purchase for investment purposes and the tax rate will be determined accordingly.
If within two years of buying the apartment the buyer becomes a resident of the country, the purchase tax will be calculated in accordance with the purchase tax of Israeli residents.
How to get purchase tax reduced
If within a year of buying the apartment the resident intends to make Aliyah, he will be able to receive the special taxation rate of new Olim. That may be lower than the taxation of the purchaser of a single residential apartment (depending on the transaction amount. New Olim pay 0.5% up to 1.8 million NIS, and 5% beyond that amount). Use of the purchase tax rate of new Olim is conditional on the New Oleh living in the apartment he bought. It is also worth noting that a new Oleh is entitled to buy an apartment at the purchase tax rate of new Olim, even if he owns another apartment in the country. It is therefore worth considering when you should use this right.
Another important detail that not everyone is aware of, is that when buying an apartment that is under construction, it is possible to get the exemption of new Olim; as long as you have moved within a year of receiving possession of the apartment. For example, if an American citizen buys an apartment that is at the beginning of the construction process, and it will take another three years for the apartment to be ready, he will have another full year to make Aliyah and get the reduced purchase tax rate.
*There are further details regarding purchase tax, and we advise you to discuss this topic with your lawyer before signing a contract.