Lior Pick, Advocate and CPA
Due to the rising apartment costs in Israel in recent years, the government decided to take some extensive means to increase the supply of apartments and lower their costs.
One of the means taken in the end of 2011 was through the Land Taxation Law (Increasing the Supply of Residence Apartments – Temporary Order) 5771-2011 (hereinafter: “the Temporary Order”) within which several provisions were stipulated as follows:
1. Lowering the purchase tax rates when buying a single residence apartment between 2.21.11 and 12.31.12.
2. Increasing the purchase tax rates for buyers of investment residence apartments (additional apartment) between 2.12.11 and 12.31.12.
3. Lowering the betterment tax rate when selling land that is determined for the construction of at least (minimum) 8 residence apartments, if the sale will occur between 11.15.10 and 12.31.11. The Minister of Finance, with the permission of the Knesset’s finance committee, was given the authority to extend this period by an additional year.
4. Giving two additional exemptions from betterment tax in selling residence apartments, each of those exemptions being limited to a ceiling of ILS 2.2 million, in addition to the exemptions stated in the fifth chapter 1 of the Land Taxation Law (hereinafter: “the Law”) when selling a “qualifying residence apartment”, all between 1.1.11 and 12.31.12.
In addition, and to further increase the supply of residence apartments, on 8.1.2011, the Knesset approved the Land Taxation Law (Legislation Amendments) (Temporary Order) 5711-2011 (hereinafter – “Amendment to the Temporary Order”), that allows an exemption from betterment tax even when selling a residence apartment that is not a “qualifying residence apartment” (such as: an apartment that is used as a clinic or as an office), provided that the sale was made between 8.1.2011 and 6.20.2013.
Within the Amendment to the Temporary Order and as an additional stimulus to sell residence apartments in the determining period, section 49(b)(1) was amended within the 71st Amendment to the Law (hereinafter: “the 71st Amendment”), and it was determined in it, as a Temporary Order for the period between 1.1.13 and 1.1.21 – that the exemption when selling a qualifying residence apartment will be awarded once every 8 years and not once every 4 years.
The Stimuli Stated in the Temporary Order
Purchase Tax Brackets (during the Period of the Temporary Order)
To decrease the cost of buying a residence apartment, section 3 of the Temporary Order stipulates that a person who will buy a “single residence apartment” (as defined in section 9(c1a)(2)(a)(1) or (2) in the period between 2.21.11 and 12.31.12 – including a person who will sell his old apartment that was his/her only apartment within the period of time stated in the section), will be entitled to improved purchase tax brackets, as said:
• To the part of the value up to ISL 1,350,000 – no purchase tax shall apply.
• To the part of the value from ILS 1,350,000 to 1,601,210 – a purchase tax of 3.5 shall be paid.
• To the part of the value exceeding ILS 1,601,210 – a 5% purchase tax shall be paid.
On the other hand, to decrease the profitability of purchasing investment apartments, it was stipulated in section 2 of the Temporary Order that a person who will purchase a residence apartment that is not his only apartment between 2.21.11 and 12.31.12 – will pay purchase tax as follows:
• To the part of the value up to ISL 1,000,000 – 5% purchase tax.
• To the part of the value from ILS 1,000,000 to ILS 3,000,000 – 6% purchase tax.
• To the part of the value exceeding ILS 3,000,000 – 7% purchase tax.
Additional Exemptions When Selling a Residence Apartment, Until 12.31.2012
The Temporary Orders allow a seller of a “qualifying residence apartment” (as defined in section 49 (a) of the Law), to sell up to 2 additional apartments, exempt from betterment tax, in addition to the exemptions according to chapter five 1 of the Law, subject to the following terms:
1. The sale was performed between 1.1.2011 and 12.31.2012.
2. The seller sold all of his proprietary rights in the qualifying residence apartment (meaning, the exemption according to the Temporary Order will not apply to combination deals).
3. When the value of the sale is up to 2.2 million ILS (hereinafter – “the Ceiling Amount”) – a full exemption will be given. However, when the value of the sale exceeds the Ceiling Amount, a partial tax exemption will be given.
4. When selling a qualifying residence apartment the consideration due to which was influenced by additional building rights, an exemption will be given subject to the provisions of section 49 G of the Law, but no more than the exemption ceiling according to the Temporary Order. Let it be clarified that when selling a part of the apartment, a relative ceiling will be given according to the sold part as well.
5. The seller did not receive the sold apartment in a transfer without consideration in the period between 11.1.2010 and 12.31.2012. for this matter, it is important to clarify:
• An apartment that was bequeathed in the aforementioned period will not be considered an apartment that was received without consideration for the purpose of the Temporary Order. Thus, one may sell it with an exemption from betterment tax as said.
• An apartment that was received by way of dissolution of a “property association”, with an exemption from betterment tax according to section 71 of the Law will not be considered an apartment that was received “without consideration” for the purpose of the Temporary Order.
• According to the Temporary Order, one may sell with an exemption a qualifying residence apartment that was received by the seller as a gift (or that originates from land that was given as a gift) before 11.1.2010, meaning that the cooling period according to the provisions of section 49 F of the Law does not apply to a sale with an exemption according to the Temporary Order.
6. The sale is not to a “relative” (as defined in section 1 of the Law), whereas the term “control” will be according to that said in section 19(4)(b)(3) of the Law. Let it be clarified that the interpretation of the Israeli Tax Authority of the definition of “relative” in section 1 of the Law, according to which a person who became a relative following marriage will still be considered a relative even if his spouse passed as long as he did not marry another, shall be valid for this purpose as well.
7. It is important to state that the seller will not be able to receive an exemption (whether partial or full) according to section 6(a) of the Temporary Order more than twice. Let it be stressed that the exercise of an exemption according to section 6a(b) to the Amendment to the Temporary Order will be counted among these two exemptions.
8. However, according to the provision of section 6(d) of the Temporary Order, exemptions exercised according to section 6(a) of the Temporary Order will not be counted among the exemptions by the power of section 49b(1) of the Law regarding exempt sales according to chapter Five 1 of the Law, but only during the period of the Temporary Order. This means that a person who will want to sell an apartment after the end of the Temporary Order (after 12.31.2012) with an exemption according to section 49b(1) of the Law will have to wait 8 years from the time of the last sale performed with an exemption, including an exemption given according to section 6(a) of the Temporary Order.
As said the 71st Amendment to the Law changed the period stated in section 49b(1) of the Law from 4 to 8 years, when selling residence apartments between 1.1.2013 and 1.1.2021.
However, a person who will exercise the exemption/s from betterment tax according to the Temporary Order may sell an additional residence apartment after 4 years, provided only that he/she will meet the conditions for an exemption according section 49(b)(2) of the Law for a single residence apartment.
Additional Exemptions When Selling a Non-Qualifying “Residence Apartment”
On 8.8.2011 the Amendment to the Temporary Order that extended the exemptions from betterment tax to sales of non-qualifying residence apartments as well was published, to give extra stimulus to increase the supply of residence apartments in Israel in the short term. The extension of the aforementioned exemption applies to apartments that are not used for residence (but for office, clinic purposes and so on) and to apartments that were starting to be used for residence but did not accumulate the required period to be considered a “qualifying residence apartment” (the 4 years before the sale or 80% of the betterment period).
Section 6a(b) of the Temporary Order (added in the Amendment to the Temporary Order) allows a seller of a residence apartment that is not a qualifying residence apartment (as defined in section 49(a) of the Law) to sell up to 3 apartments as said with an exemption from betterment tax, under the following conditions:
1. The sold apartment is a “residence apartment” as defined in section 1 of the Law, but it does not meet the definition of a “qualifying residence apartment” in section 49(a) of the Law.
2. The right to an exemption from betterment tax shall apply even if there was “non-conforming use” of the apartments, not in accordance with a permit.
3. The sale was performed in the period between 8.1.2011 and 6.30.2013.
4. In deals in which the value of the sale does not exceed ILS 2.2 million per apartment – full exemption from the betterment tax will be given. When the value of the sale exceeds ILS 2.2 million– a partial exemption will be given.
5. The seller did not receive the sold apartment in a transfer without consideration between 6.5.2011 and 6.30.2013.
6. The sale is not to a relative as defined in section 1 of the Law, and the term “control” will be according to that said in section 19(4)(b)(3) of the Law.
7. In the sales agreement, it was determined that the apartment must be used for residence for at least two consecutive years, that will begin no later than six (6) months after receiving possession of the apartment by the buyer, or one year after the date of the sale – according to the soonest, and it was also determined that the buyer is aware that if this condition will not be fulfilled he will be charged with a purchase tax, at a rate of 15% of the value of the sale. This is a very problematic term.
This provision’s goal is to achieve an increase in the supply of apartments to be used for residence and to ensure that the stimulus in the form of a tax exemption will fulfill its goal and the apartments will indeed be used and converted for residence purposes.
8. The seller may not receive an exemption, whether full or partial, according to section 6a(b) of the Temporary Order, more than 3 times. The exercise of the exemption according to section 6(a) of the Temporary Order and the exercise of an exemption according to section 49b(1) of the Law, exercised since 1.1.2011 will count among the exemptions for tax exemption purposes according to section 6a, and thus, overall, in the period between 1.1.2011 and 6.30.2013, it will not be possible to get more than 3 exemptions in the aggregate according to section 6(a) and 6a(b) of the Temporary Order and according to section 49b(1) of the Law. Moreover, a person who will wish to sell an apartment with exemption from the betterment tax according to section 49b(1) after 7.1.2013 will have to wait 8 years (according to the 71st Amendment to the Law) since the last sale performed with an exemption, including exemptions according to section 6a(b) of the Temporary Order.
9. Mixed use – in case an apartment that was divided into two separate units, each of which meets the definition of a “residence apartment” individually and independently, while one of them is used for residence and the second one is not; is sold, the second apartment may benefit from the exemption orders according to section 6a(b) of the Temporary Order and the first unit will be awarded an exemption according to section 6(a) of the Temporary Order or according to section 49b(1) of the Law.
Under these circumstances, each residence apartment will be examined separately for the purpose of the exemption ceiling (ILS 2.2 million). In circumstances where the apartment seller chooses to combine the two units in to one prior to the sale, the main use made of the apartment as a whole will be examined, and the exemption ceiling of ILS 2.2 million shall apply to all rights in the unified apartment.
For this purpose, let it be stated that the question, whether two separate units or one single unit are concerned, is a factual question that will be examined according to the apartment’s actual state, and not necessarily in accordance with its state in the plans or the drawings.
The aforementioned contains nothing to serve as a legal opinion and/or an alternative to specific legal advice. We will happy to be at your disposal for any queries and explanations regarding this or any other legal issues.
Our office specializes in taxation, Civil & commercial issues, Oil & Gas laws, Real Estate, Corporate laws & M&A, High Tech & venture capital, Hedge funds, Banking& Finance, Trust laws & cross border transactions.
Sincerely and Respectfully,
Lior Pick and Co Law Offices
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