Kahlon discovers the Laffer Curve

Home purchases in Israel by foreign residents fell to 2,241 homes in 2016, down 31% from 2015, according to figures provided by the Ministry of Finance. The sharpest fall was in Jerusalem where home purchases by foreign residents fell by 41% with a 25% fall in the Tel Aviv and Netanya regions. The fall in home purchases in Israel by foreign residents was far sharper than in the entire market and means that only 2% of homes now purchased in Israel are bought by foreign residents. The sharp fall was due not only to Minister of Finance Moshe Kahlon's actions, including raising the purchase tax from 5% to 8-10% on luxury apartments, in addition to the elimination of the exemption from betterment tax that took effect in 2014, but also the strengthening of the shekel, making it more expensive for foreign residents to buy homes.

There was not a single housing deal over NIS 50 million in 2016, whereas there were several such deals in the previous year and several deals worth more than NIS 100 million in 2014. In Jerusalem, only two luxury apartments (over NIS 10 million) were bought by foreign residents in 2016, down from 12 in 2015. Nevertheless, there was no shortage of major deals last year, with 19 of the 30 most expensive real estate deals last year in Tel Aviv.

Capital gains tax extended starting in January 2014

The Economic Arrangements Law passed by the Knesset in August brought about a revolution in real estate tax legislation. The consensus against the tax exemption for investors and luxury homes led to its cancellation, but the new regulations also produced some casualties along the way. Israelis have become accustomed to enjoying the exemption, but anyone owning more than one home will be taxed on its sale starting January 1. Until now everyone, not just tax experts, knew enough to claim the exemption if they hadn’t sold another home in the previous four years. The traditional exemption, anchored in clause 49b-1 of the law, had an enormous effect on investing in homes in Israel. So with four words of sheer poetry the revolution was proclaimed: “Clause 49b-1 is void.” From now on we will have to pay a property-betterment tax when selling our homes even if we hadn’t sold another one during the previous four years, and only because we own a tiny extra pad in Tel Aviv’s Florentine neighborhood. The price of our home once again isn’t what we’ll pocket.

Changes in Israel real estate tax law

Real Estate scarcity and increasing prices has prompted the Israeli government to change many of the existing rules in 2011. Here is a summary of what has changed this year:

Purchase tax change

Purchase tax for single apartments was lowered while purchase tax for an additional apartment was raised. This helps young couples and families purchasing a home (where this is going to be the only apartment they own) as it greatly reduces the purchase tax they will have to pay. Indeed, if the apartment is less than 1,350,000 NIS there won’t be any purchase tax to pay at all. However, anyone who already owns an apartment and would like to invest in real estate by purchasing an additional apartment will pay a much higher purchase tax. Indeed, if the additional apartment that they buy is 1,000,000 NIS they will pay 5% of this - a whopping 50,000 NIS! Anyone who enjoyed in the past a partial exemption from purchase tax (such as new immigrants and disabled people) should crunch their numbers first. After these changes the difference between the purchase tax paid by a new oleh for example and that paid by the purchaser without this exemption is negligible and in some cases the new oleh will pay more if he asks for this partial exemption!

Capital Gains Tax modifications

In all real estate transactions the sellers are liable to pay capital gains tax. In the case of residential apartments the existing law allows for several types of exemptions from this tax. Examples of this are: If a person owns more than one apartment then he can sell one of his apartments with an exemption from capital gains tax every four years. If the seller has only one apartment then he can get an exemption from capital gains tax once every year and a half. This means someone (who only has one apartment) can buy an apartment, sell it and get an exemption and then buy another apartment instead of the one he just sold and sell that apartment in a year and a half and get an exemption from capital gains tax on that apartment too. There are also exemptions for the sale of apartments gotten through inheritance, giving apartments as gifts between close family members, the sale of two small apartments in order to buy one large one etc. Under the new law (which will be in effect for a period of two years only, unless extended) sellers will be able to get an additional two exemptions in addition to any exemptions they could have gotten under the existing law. This means that people with multiple apartments can sell some or all of them and get exemptions from capital gains tax for these sales without having to wait the four years between sales with exemptions.

Limit to the exemptions from capital gains tax

The additional exemptions in the new law are limited to a price of 2,200,000 NIS. This means that if the price of the apartment sold is less than 2,200,000 NIS then the seller will get a full exemption from the capital gains tax. If the price of the apartment sold is more than 2,200,000 NIS then the seller will get an exemption from the capital gains tax for the amount of the price up till 2,200,000 NIS and he will be taxed for the amount of the price above 2,200,000 NIS.

Tax planning

The changes in the law make it necessary for sellers to do some tax planning with their real estate attorney. For example, if a seller has an apartment that is worth 3,000,000 NIS and an apartment that is worth 2,000,000 NIS he can get an exemption now for both apartments without waiting four years between sales. He should use the previous law for the exemption from the capital gains tax for the apartment selling for 3,000,000 NIS because the previous law did not have a price limit and only apartments that sell for more than 2,200,000 NIS can get a full exemption from the capital gains tax under the previous law. For the apartment selling for 2,000,000 NIS the seller should ask for the exemption under the new law. This is just a simple example of how a little tax planning can save a lot of money.

Back to old rules in 2012

The new law is in effect until the end of December 2012. The purpose of this law is to encourage people with several apartments to sell them now, thereby flooding the market with more second hand apartments which may bring down the prices. In order to put pressure on all apartment owners to sell their apartments now, another change in the law was enacted in August of this year. According to this change, starting from 2013 the law pertaining to the exemption from capital gains tax will revert to what it was before, but the exemption from capital gains tax will only be allowed once every 8 years for people who own more than one apartment. However, people who only own one apartment may sell once every year and a half and get the exemption from capital gains tax just as they did under the previous law.

The new law has brought with it many legal and technical problems as well. We will have to wait and see if the changes in the law bring about the desired effect of bringing down the prices of apartments in Israel or at least of stopping the rise in prices.

Source Buy Property in Israel

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