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

Fischer predicts 4.7% GDP growth in 2011

Stanley Fischer told the Finance Committee this week: we are far from recession, but the effects of the crisis in Europe will hurt Israel.

"As far as the economic situation is concerned, there is a slowdown in growth. We're growing more slowly than last year. The slowdown began in the second quarter of this year," Governor of the Bank of Israel Prof. Stanley Fischer told the Knesset Finance Committee. "The reported growth does not meet our prior estimates, but it does fit the average growth rate of the past 30 years. It is respectable growth that we should get used to." Fischer added, "We are not in a recession; we're far from that."

Fischer warned, however, "There is a very serious crisis, especially in Europe. If the Euro Bloc does not wake up, it's impossible to know what the repercussions will be, but they won't be good. We already see the effects of the crisis in Europe on Israeli exports. "A crisis in Europe will affect us, at both the financial and non-financial levels. If European banks crash, that will affect us too. The financial climate will be a lot worse, and we'll be a lot less optimistic. It could happen." Fischer said that the Bank of Israel now predicts 4.7% GDP growth in 2011 and 3.2% growth in 2012. "The Ministry of Finance's projections are too optimistic, and that's why we're missing the targets," he added.

Fischer reiterated his position enunciated at yesterday's press conference that Israel must act responsibly in view of the global economic crisis, notwithstanding the social protest. "I advise that we continue to manage the economy responsibly, and not to capitulate to populism." He advised the Finance Committee not to breach the budget framework or to raise tax rates. Fischer than changed the topic to the need to amending the Banking Law. "The system of controlling cores in Israel is not prevalent in the world. Banks are not usually controlled through a controlling core, but in Israel that is how it is."

Israel GDP growth beating that of Western World

Never mind the collapse in confidence in Europe, the Palestinian proposal for United Nations recognition and heightened tensions with neighboring Egypt and longtime ally Turkey. The Israeli economy just keeps growing faster than the rest of the developed world. The International Monetary Fund this week raised its forecast for the country and cut its estimate for the global economy on the impact of the European debt crisis. Israel’s gross domestic product will expand 4.8 percent this year, according to the Washington-based lender. That’s up from an April forecast of 3.8 percent and triple the pace for the average of the 34 advanced economies.

Citigroup Inc. said on Sept. 18 it would establish a new Israeli research center and Standard & Poor’s a week earlier raised the country’s credit rating. It cited the discovery of two gas fields off the coast of Israel that hold an estimated 25 trillion cubic feet of the fuel. Mellanox Technologies Ltd., the 12-year-old Israeli adapter maker part-owned by Oracle Corp., says sales will grow 80 percent in the third quarter. “The Israeli economy is very vibrant,” Finance Minister Yuval Steinitz said in a Sept. 20 interview with Bloomberg Television. “We enjoy very low unemployment and nice economic growth and this is mainly because we managed to develop very advanced high tech industries and very strong exports.”

Technology Capital

The stock market in Israel, whose population of 7.8 million is similar to Switzerland’s, was upgraded to developed-market status by MSCI Inc. in May 2010, the same month the 63-year-old country was accepted into the Paris-based Organization for Economic Cooperation and Development. The country has about 60 companies traded on the Nasdaq Stock Market, the most of any nation outside North America after China and is also home to the largest number of startup companies per capita in the world. Israel ranks third in terms of projected growth this year among MSCI’s list of 24 developed economies, after 6 percent for Hong Kong and 5.3 percent for Singapore, according to the IMF. “Israel’s exports are high-added value exports like informatics and technology,” said Jean-Dominique Butikofer, a fund manager who helps oversee about $1 billion of emerging- market debt at Union Bancaire Privee in Zurich, including quasi-sovereign Israeli bonds. “They’re not exporting Gucci bags. If there’s a slowdown, these are the kind of assets that are good to have.”

Talent Pool

Venture-capital backed Israeli technology companies raised $364 million in the second quarter of this year, a 77 percent jump from the $206 million raised in the year-earlier period, according to PricewaterhouseCoopers LLP Moneytree report. Seventy-six companies raised funding in the three-month period, compared with only 60 last year, the report said. “One reason that the economy continues to do well is the component of innovation and ability to adapt to a changing environment,” Citigroup Israel Managing Director Ralph Shaaya said in explaining the New York-based bank’s decision to locate a research center in Israel. ‘There is a rich pool of talent in the high tech sector. The propensity for innovation is high.” For Mellanox, orders are persisting even as global growth falters. “In these situations people tend to look for products that do more with less,” Chief Executive Officer Eyal Waldman said in an interview on Aug. 29. “We still see the orders going in so we don’t feel the macro waves coming.” Shares of Mellanox have jumped about 28 percent in Tel Aviv trading this year, compared with a 21 percent drop on the benchmark TA-25 index. In New York, shares gained about 23 percent, compared with a drop of about 4 percent in the Nasdaq composite index.

Political and Economic

The good times may not last. After withstanding a Palestinian uprising in 2000 that frightened away tourists and deterred foreign investment and a credit crisis in 2008, Israel now faces troubles both political and economic. Palestinian Authority President Mahmoud Abbas plans as early as tomorrow to ask the Security Council to recommend that Palestine become the world body’s 194th member. The U.S. has threatened to veto any resolution in the Security Council. Bank of Israel Governor Stanley Fischer, whose actions in 2008 helped the economy recover from the global financial crisis, this week voiced concern about the possible effects a prolonged global slump and geopolitical friction could have in coming months. His worry was reflected in the IMF forecast for 2012, which predicts a slowing to 3.6 percent.

Lowest Jobless Rate

Israel has emerged from economic turmoil before. In 2000, as peace with the Palestinians looked possible following the 1993 Oslo accords and the Israeli technology industry took off, growth was at 9.1 percent. Then, in December, the second intifada, or Palestinian uprising, broke out, just as the technology bubble burst on world stock markets. In 2001, Israel contracted by 0.1 percent and in 2002, by 0.6 percent. By 2004, growth had returned to 5.1 percent; it reached 5.7 percent in 2006. Israel’s unemployment rate declined to 5.5 percent in the second quarter of this year, the lowest level since at least 1985. Still, next year’s IMF outlook of 1.8 percent growth for the U.S. and 1.1 percent growth for the euro area, Israel’s two main markets, is likely to moderate demand for the country’s exports, one of the main growth engines of the $217 billion economy. The Palestinian statehood bid could give the new entity more legal clout or raise nationalism pressure should the Security Council vote to reject it.

Turkey Expulsion

Israel is also facing security threats as the so-called Arab Spring creates turmoil in its Middle Eastern neighbors. In Egypt, the pipeline that carries gas to Israel has been bombed four times since the January uprising against former President Hosni Mubarak. A cross-border attack by terrorists who came from the Sinai peninsula killed eight people near the resort city of Eilat in August. Turkey, one of Israel’s largest regional trading partners, expelled the Israeli ambassador and halted defense purchases after Israel refused to apologize for a commando raid last year on a Turkish vessel attempting to breach the blockade of the Hamas-controlled Gaza Strip that left nine dead. Israeli five-year credit-default swaps, or the cost of protecting government debt against non-payment for the period, are at 190, the highest level in more than two years, according to data provider CMA. It is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. The shekel has weakened more than 5 percent this year, headed for its biggest annual drop against the dollar since 2005 when it fell 6.1 percent.

Investment Grade

“We weren’t Switzerland to begin with,” said Yaniv Pagot, chief strategist for the Ayalon Group, a holding company with interests in insurance, the capital market, and real estate. “We’ve had the Lebanon War, the Cast Lead military operation in the Gaza Strip, and the economy has dealt with temporary situations. If the situation lasts longer, if it becomes permanent, that could have an impact.” The economy may already be feeling the bite. Exports, excluding ships, aircrafts, and diamonds, declined for the fourth month out of five in August to their lowest since January, according to seasonally adjusted figures. This didn’t deter Standard & Poor’s from raising Israel’s credit rating earlier this month to A+, its fifth-highest investment-grade rating, just a few weeks after cutting the U.S. and before cutting Italy. S&P cited the two gas fields, Tamar and Leviathan, off its Mediterranean coast. “You have a situation where the global economy is clearly running into a roadblock and having a tough time while the Israeli economy is going to bend but it isn’t going to break,” said Daniel Hewitt, senior emerging-market economist at Barclays Capital in London. “We think Israel can maintain positive growth. Israel has a strong economy with a strong base.”

Source Bloomberg