Tuesday, September 20, 2011

Changes in betterment tax

As property costs spiraled upward and protests arose, the government made moves to keep prices in check, including incentives and disincentives. Purchase tax rates on second homes were bolstered, but the government also made far-reaching concessions on betterment taxes - paid on capital gains from real estate - for people selling investment homes.

The rate of betterment tax on the sale of a residential property is 20% of the betterment itself (if the property was bought after November 7, 2001 ), betterment being the increase in the property's value less all associated costs - after adjustments for depreciation and inflation. For example, a property bought for NIS 1 million and sold for NIS 1.2 million would be assessed betterment tax equaling 20% of the NIS 200,000 in increased value, assuming no inflation or depreciation effects, a tax of NIS 40,000. Until this year anyone owning more than one home could claim a full exemption from betterment tax just once every four years. But if the property sold was the seller's only dwelling, a full exemption could be claimed every 18 months.

At the beginning of the year, a temporary provision was enacted allowing exemptions on two additional homes for a limited time. Anyone can sell up to three "eligible dwellings" used primarily for residential purposes: One for an unlimited sum and the others for a maximum NIS 2.2 million each, but when the price exceeds the limit, the tax will be applied just on the relative portion. This exemption is available until the end of 2012. The law itself was also amended last month such that from January 2013 the exemption on the sale of an eligible residential home by the owner of more than one dwelling will be given just once every eight years, instead of once every four years as before. The exemption given once every 18 months on residences sold by anyone owning no additional dwellings was left unchanged.

Would it be worthwhile to sell a property or two, claim the exemption on them, and immediately buy other properties or even repurchase the very same properties? It seems the tax officials who prepared the temporary provision did their homework: selling the property may exempt the capital gain from being taxed at 20%, but a purchase tax of 5% to 7% (depending on price ) was also imposed, making this less worthwhile for the investor. It should be noted that purchase tax applies to the full price of the property, whereas betterment tax is applied to the difference between the selling price and the purchase price (with relevant adjustments ). This is meant to minimize, to the greatest extent possible, the economic attractiveness of "circular transactions" or reinvestment of sale proceeds in residential property.

No one is certain whether the carrot and stick tactics will lead to an immediate drop in home prices. But the moves, as part of a range of government measures to expand the supply of housing and reduce demand, will likely eventually help curb rising prices and perhaps even lead to prices falling.

Source Haaretz

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