Property investing in Israel: a tax refresher

Although Israel imposes taxes on real-estate income and gains, there are numerous exemptions and exceptions. You will need to consider not only income tax but also acquisition taxes, VAT, capital-gains tax and inheritance tax.

Acquiring the asset

Israel imposes an acquisition tax on Israeli real-estate interests of up to 5% percent of the asset. You need to add to that the cost of the lawyer. Typical cost is around 1.5% + VAT (currently at 16%), but you should be able to negotiate this down significantly for big transactions.

Renting out

Private landlords in Israel pay no Israeli income tax if total monthly rental income is less than ₪4,680; they lose ₪1 of exemption for every extra shekel they make above that figure, but they have two more options:

1. Israeli tax at 10% on gross rental income of the previous calendar year if paid by the end of January;
2. Israeli tax at regular rates on rental income net of expenses and including depreciation of the building cost and any mortgage interest.

Landlords of commercial property and companies get no exemptions; they pay regular tax on rent. Individuals pay tax on rent net of expenses and depreciation at rates of 30% to 45% plus National Insurance Institute payments at various rates. Companies generally pay company tax on rent net of expenses and depreciation at rates of 25%. Dividends are taxed at rates ranging up to 25%, subject to any double tax treaty.

Depreciation is on the building element, not on the land. The depreciation rates are 2% of cost for a good-quality building, otherwise 4%. If the building element is unknown, you are allowed to assume it is two-thirds of the overall cost. Each asset is depreciated separately on a “straight line” basis (percentage of cost, not written down balance). Regular Israeli individual tax rates currently go up to 45%. NII payments also apply at various rates but are minimal for non-residents.

Selling

Israel imposes “land appreciation tax” (LAT) on capital gains from Israeli real estate. The Land Registry (Tabu – a Turkish word) checks that you don’t forget. Companies generally pay 25% tax and individuals pay 20% if the real-estate asset was acquired after November 7, 2001.

Individuals are exempt from LAT on Israeli home sales in many cases, including: (1) After an 18-month waiting period following a previous exempt sale if they only own one home in Israel; (2) after a four-year waiting period following a previous exempt sale if they own more than one home in Israel. It doesn’t matter whether the seller is an Israeli resident or not, or what other properties the seller has outside Israel. For assets acquired in 1961 or earlier, special reduced tax rates may apply.

Financing

Financing the asset is a good way to reduce your tax liability since mortgage is a deductible expense. Note that 16% VAT and 25%-plus withholding tax usually apply to interest unless it is paid to an Israeli financial institution. With most banks you can borrow in ILS, USD or EUR either fixed or floating. While LTV (Loan to Value) requirements are more stringent now (usually banks will require a 40% deposit) rates are still quite attractive.

It's important to shop around as prices vary greatly from one institution to the next and depending on your credit profile and the maturity of the loan, you can get rates as low as LIBOR + 1.5%. It's also worth looking at the private banking services that the institution offers as typical experience in a retail branch is not something you might look forward to...