Apartment Buyer’s Guide – Purchase Tax

The information brought to you is intended to assist you when you plan to buy an apartment for residence.

According to the law, each residential apartment buyer is obligated to file a declaration of his purchase and the payment of purchase tax.

“Residential apartment”

A “residential apartment” is exactly what it says: if you purchased an apartment, the construction of which was not yet completed and there is no obligation of the contractor to complete its construction, it is not considered a “residential apartment” and the tax rate for it is equal to that on land, 5% of the purchase value.

Only if the contractor has undertaken in the transaction agreement to complete the construction of the apartment, it is considered a “residential apartment” for the purposes of purchase tax payment.

For your attention, a purchaser of a residential apartment which will serve entirely or mainly for the purpose of a business rather than residence, is not entitled to the graded purchase tax rates which apply to a residential apartment and the tax which applies to it is 5% of the sale’s value.

The regional Land Taxation Offices are the ones handling the subject of purchase tax and betterment tax on residential apartments.

Purchase Tax

As aforementioned, purchase tax is imposed on the buyer of a residential apartment. After you pay the purchase tax as aforementioned you will not be required to pay additional taxes to the State’s Treasury for the registration of the apartment with the Land Registry Bureau.

Purchase tax, the tax rates – single apartment

The tax rate for the purchase of a residential apartment by an individual for who this is the only apartment, is gradual, and are divided in three parts according to the apartment’s value: With regard to the first part of the value, the tax rate is 0%, regarding the second part of the value, the tax rate is 3.5%; whereas for the third part of the value, which is the highest tax bracket, the rate is 5%. 

The value of all three parts (the tax brackets) is updated every three months (January 16th, April 16th, July 16th and October 16th of each year), based on the rate of increase in the index of the residence services of tenants ownerships.

Additional apartment

Whoever purchases an apartment in addition to the one he owns, shall not enjoy the easement of the first bracket and the two tax brackets of 3.5% and 5% shall apply to him.

However, if the purchaser sells his first apartment within 24 months or within 12 months from the delivery date stated in the agreement (if the apartment was purchased from a contractor), he will also enjoy the tax rate of the first bracket as if he was purchasing a first apartment.

On the Tax Authorities’ web site under the menu “calculators” you can find a simulator for the tax calculation.

Residential apartment exchange

Upon purchasing the exchange right a tax easement in the purchase tax is provided so that up to the value of the sold apartment a purchase tax rate of only 50% of the applicable tax will be paid.

Eviction and construction

A residential apartment received by a tenant from the entrepreneur of an eviction construction site or outside of it in consideration for his old apartment at the site – is exempted from purchase tax.

Those entitled to a reduced purchase tax on a residential apartment (0.5%)

A.                 Disabled

        A disabled person with a permanent medical disablement at a rate of 100% or a 90% disablement due to the accumulation of disabilities in various organs;

      A disabled person according to the definition of the National Insurance Institute (NII) for who a permanent earning disability at a rate of at least 75% was determined;

       A disabled person with a permanent disability rate of at least 50% who is one armed or one legged or paralyzed

       A person disabled as a result of a traffic accident for which he was granted a permanent disability of at least 50%;

       A disabled person according to the Disabled Persons Act or the Nazi War Disabled Persons Act, who has at least 50% permanent disablement;

        A couple who purchase a residential apartment and only one of them is disabled; both of them are entitled to the reduced tax.

B.                 Bereaved family members and family members of hostility activities victims

        Family members (parent, widow and orphan up to the age of 40) of a soldier killed in action who are entitled to compensation;

        Survivors of a casualty who are entitled to compensation according to law;

Disabled and bereaved family members as aforementioned are entitled to an easement in the payment purchase tax for the purchase of a residential apartment at a rate of 0.5% of the purchased apartment’s value. This entitlement can be used only twice.

In order to obtain the easement in the purchase tax, the applicant must apply to the regional Land Taxation Office (in whose territory the apartment was purchased), using form 2973 which can be obtained in those offices.

C.                 Immigrants

         A person holding an immigrant visa or an immigrant certificate (according to the Law of Return);         A person holding a visa or a temporary residence permit type A1 (according to the Entrance into Israel Regulations)

The aforementioned based on a registration certificate by The Ministry of the Interior.

          An immigrant is entitled to a reduced purchase tax rate of 0.5% up to a ceiling which is updated once every three months. Above the ceiling, a tax rate of 5% shall be paid as aforementioned.

          The ceiling amount is updated on 16.1, 16.4, 17.7, 16.10 of each year. (The ceiling amount until 15.04.06 is NIS 1,113,230). An immigrant is entitled to the aforementioned tax easement in two cases:

1.     Once upon the purchase of an apartment for his residence or the purchase of vacant land to build on it a residential apartment which will be used for his residence.

2.     One more time upon the purchase of a business or vacant land for the purpose of establishing a business in which the immigrant himself and/or his relative will be engaged in. A business in this instance – including an agricultural farm.

This easement is given providing the apartment was purchased within 7 years from the date of immigration to Israel for the first time, or one year prior to his immigration.

Those rights can not be extended. The period of military service in the IDF is not considered in the count of the seven years.

A couple purchasing an apartment and only one of the couple is an immigrant; both are entitled to the easement. Also, a couple who purchased the apartment prior to their marriage will receive the easement providing they were married within one year of the purchase.

In order to obtain the easement, it is necessary to provide the Land Taxation Office with a registration extract from the Ministry of the Interior and enclose to it an application of form 2973.

In all the aforementioned cases the provision for the tax easement is that the apartment will be used for the purchaser’s residence.

Discount offered to a person receiving a residential apartment as a gift (with no consideration) from a relative.

As a rule, it was determined that an individual receiving a residential apartment as a gift from his relative (free of charge) will pay a purchase tax of ⅓ (one third) of the regular purchase tax.

The transfer of a residential apartment between married couples, residing together in the same apartment, as a gift (free of charge) is totally exempted from purchase tax. If the couple does not reside in that same apartment, they must pay one third purchase tax like any other relative.

For this matter “Relative” meaning; a spouse, a parent, a descendent (grandson, great grandson) the spouse of the descendent, brother and sister

When part of an apartment is transferred to a relative as a gift, the regular tax calculation will made regarding the entire apartment and the gift receiver will pay one third of the tax on the relative portion he will receive from the relative. 

The purchase tax calculation on a residential apartment which was received as a gift (with no consideration)

The value of the apartment is determined according to its value in the free market meaning from a willing seller to a willing buyer.

Therefore, you are entitled to determine the value of the apartment by yourself according to your best knowledge and information you have and calculate the purchase tax rates accordingly, meaning to prepare a self assessment and declare accordingly. The Manager of the Land Taxation will be happy to approve the self assessment you prepared providing he determines that the assessment you made is reasonable and that the tax calculation was prepared as required.

Declaration obligation

A purchaser of a residential apartment must declare the purchase of the apartment, within 30 days, to the Regional Land Taxation Office in which the apartment is located, on form 7002. Afterwards he will receive a purchase tax assessment which must be paid within 14 days of its receipt.

If the apartment purchaser calculates the purchase tax by himself he will be entitled to deliver the declaration on form 7002 with the enclosure of the tax payment he has calculated within 50 days (rather than 30 days) from the date of purchase. Any delay in payment requires the payment of linkage charges, interest (at a rate of 4%) and a fine.

It is possible to pay the tax at all the banks by way of a payment slip which can be obtained at the Land Taxation Office at the time of filing the declaration.

For your attention

The purchase date is the date of the contract between the parties, meaning the day of signing a memorandum of understanding or the date of the first payment, if those occurred prior to the signature of the contract.

It is advisable to ascertain that whoever represents you in the transaction has filed the declaration according to law and made sure that the tax be paid as well as that the apartment was transferred to your name and legally registered at the Land Registration offices (Land registry bureau, Israel Land Administration, the housing company)

The Land Registry Bureau – Tabu

Almost every person is needy at least once in his life time of the various service of the Land Registry Bureau – the Tabu). Any person selling or buying an apartment in Israel finds himself needing the services of the Tabu in order to obtain an extract certifying the ownership of the apartment or the history of the structure and the land – depending on what is requested.

One of the remnants of the Ottoman Empire which still exists in Israel are the stamps. In order to obtain an extract from the Tabu, one must first purchase stamps which are sort of a “tax” the state collects.

Things important to pay attention to

If you are about to perform a realty transaction it is essential that you get an extract from the Tabu – whether you are the seller or the buyer. It is advisable you do it twice; at the beginning of the negotiations, since sometimes problems that it is better not to be faced with at a later stage, are discovered, and once again one day prior to the signature of the agreement (preferably, if possible, even in the morning of the signature).

Even if you, the sellers of the property, are convinced that everything is in order, it is possible that encumbrances were imposed on the property of which you are unaware. It so happens, for example, in cases that an antiquity site was discovered on that location. Notices may have been sent to an old or inaccurate address - and the buyer may accuse you of trying to cheat him.

It is advisable to obtain at least once a year an extract relating to inheritance property to check that no one attempted to make changes to the ownerships.

In case of purchase or sale of an apartment in a condominium, it is advisable not only to obtain the extract but also to request to peruse the condominium order and copy it. In each such order are listed all the limitations imposed upon the house.

Carefully examine that the ownership in the property is that of the body pretending to be the owner. Ascertain it with the I.D of the individual or the company number in case of a company. In the past it was not customary to enter registration at the Tabu with the I.D certificate number of the owner, if the number does not appear, demand that the owner register it with the Tabu in a procedure accompanied by an affidavit by that person and that of another stranger person who knows the owner and can detail how the property reached the hands of the owner.

Insurance companies, upon providing loans, are of the habit of registering a lien at the Tabu upon the property of the loan receiver, the amounts normally registered are not updated. It is very advisable to approach the mortgaging body to find out the correct amount as of the date of the transaction.

If you encountered the registration of a warning notice – beware! The notice warns you of problems with the completion of the transaction. You need to examine each notice for its merit.

In case of a condominium which was nor registered at the Tabu, as is customary with most new buildings, the warning notices of the apartment purchasers are of a general nature and do not related to the specific property. It is necessary to approach the warning notice registers or their lawyers in order to determine to who those warning notices relate, to make sure an apartment was not sold twice. If warning notices exist in favor of banks or mortgage providers, it is important to check that those do not relate to the specific area of your apartment.

In the Tabu extracts are noted foreclosures by creditors such as V.A.T, Income Tax, notices relating to official receivers and estate executors. Every notice is significant; even if you may conclude the transaction, it is still subject to the notice.

Receiving the extract thru the internet is a good and recommended method although it is necessary to be sure to receive a Tabu signed extract by mail since an unsigned extract obtained thru the internet has no legal validity.

Advisable to know: Most of the land in the country is owned by the Israel Land Administration from which it is not possible to obtain an extract. Even when the Administration provides a certificate it contains a clause stating that the Administration is not responsible for the data whereas the information obtained from the Tabu is evidence of its true contents.

As the years passed, Israel became the most taxed country in the area of realty – taxes constitute more than 40% of the price of a new apartment. The abundance of taxes and levies and its complexity makes every real estate transaction into a “mine field”. The final price of an apartment includes among other an improvement levy, betterment tax, V.A.T and at the end of the way also a purchase tax paid by the apartment purchaser.

Real estate taxation: who pays and how much?

Purchase tax

Purchase tax is imposed upon every residential apartment buyer (an apartment intended and worthy to serve for residence, the construction of which was completed). It is important to know that there is an obligation to report within 30 days the purchase of an apartment to the Land Taxations Office and the duty to pay the tax within 14 days of receipt of the assessment.

The purchase tax is amended quarterly according to the consumer’s price index. In the case of a single apartment, the purchase tax rate for the purchase of a residence apartment by an individual who is a resident of Israel are graded by three brackets in accordance with the apartment’s value (The tax brackets are updated until the 15th of April 2006):

Up to NIS 594,795 – tax free

From 594,795 und up to 737,550 NIS – 3.5% tax

Above 737,550 NIS – 5%

The purchaser of an apartment in addition to the one in his possession will not enjoy the easement of the first tax bracket, but rather pay the tax according to the two higher tax brackets – 3.5% and 5%.

When an apartment is purchased to replace an existing residential apartment, it is possible to refrain from the additional tax if the person purchasing the additional apartment, sold within 18 months of the purchase of the new apartment, his first apartment. In such case, the purchaser will be entitled to enjoy the exemption of tax in the first tax bracket. This benefit is intended for those people who exchange an apartment to enable them to enjoy the first tax bracket even if they have not yet managed to sell their previous apartment, in order to avoid a situation that purchase tax at the high rate be paid by whoever at the end intended to own only one apartment.

In addition there are several exemptions for certain people which determine that the tax applicable to the purchase is 0.5% of the total value price of the entire apartment, without any brackets. The following are the exemptions: A disabled person, victims of hostility activities, bereaved families (parent, widow and orphan up to the age of 40). This exemption may be used only twice.

A new immigrant is also entitled to a reduced rate of 0.5% however the calculation is limited to an apartment value ceiling of NIS 1,113,230. The easement for the immigrant is also granted only twice (once for the purchase of a residential apartment and once for the purchase of a business). The easement is limited to a period of 7 years from the date of his arrival as an immigrant.

A person receiving an apartment as a gift from his relative (meaning without consideration) will pay only ⅓ from the purchase tax according to the aforementioned calculation. However, the transfer of an apartment between married couples who are living together in the same apartment, as a gift, is totally exempt from the purchase tax (provided they lived together in the same apartment).

A tip – when buying a second hand apartment, it is necessary to check with the Tabu offices that there is no tax debt from previous purchases which were not paid, otherwise the possibility to transfer the apartment by the buyer will not be granted. Another thing, in case it is desired to order from the contractor additions or alterations, it is advisable not to include it in the purchase agreement, since this will increase the price of the apartment and accordingly the purchase tax. It is advisable to perform the alterations by an outside contractor.

Sales tax

Sales tax is imposed upon the seller of a property (contractor as well as a private person) which is not intended for residence (land, commercial real estate – industry, trade and offices). The tax is in the rate of 2.5% of the value of the sale of the property. In the past a sales tax of 0.8% was customary even on sellers of residential apartments. The sales tax for residential apartments was cancelled as of November 2001 in the frame of amendment 50.

Land Betterment Tax

Land betterment tax is the tax collected on the increase of the value of a property during the years of ownership, and in reality, it is equivalent to capital gain tax in the income tax. Advocate Shmuel Shuv who specializes in real estate laws demonstrates; if a person purchased an apartment for 100 thousand Shekels in the year 1990 and would like to sell it today fro 500 thousand Shekels, he will be required to pay tax on the difference between the purchase price and the selling price less linkage differences to the consumer price index.

“There exists a very complex system of betterment tax exemptions”, says advocate Shuv. “A person who has one residential apartment may sell it without having to pay betterment tax but a minimal period of 18 months between the purchase and sale is required. A person, who owns two or more apartments, may sell one apartment every 4 years to obtain the exemption”. According to him, it is important to remember that with regard to the exemptions a family unit of two parents and children up to the age of 18 are considered one seller.

A tip – this is a complex area, it is advisable to consult with an advocate specializing in real estate taxation prior to the performance of a transaction in order to examine the entitlement to the exemptions provided by the law.

Improvement levy

The local committee is entitled to demand an improvement levy at a rate of 50% of the improvement which ahs improved the property as a result of a City Planning Plan approval which has added rights in the properties. So as an example, a building in which the addition of a basement was approved, or adding floors, building a room on the roof etc. is already a debtor, created at the moment of the approval of the plan allowing the addition. The duty to pay will arise when we wish to realize the property, meaning, upon issuing a building permit or selling the property.

An improvement levy is also imposed when easements are approved, beyond the construction rights allowed in the plan such as adding a floor or increasing the number of units, not in the frame of the plan but rather in the frame of an easement. Usually constructed property owners will face the payment demand of the improvement levy in the cases of land adjacent homes and roof apartments where an expansion is possible, and usually the seller is the bearer of the improvement levy.

A tip – It is important to pay attention that until the realization, the created debt carries only linkage, after realization it carries a high interest of 0.75% per month, so that it is recommended, even if the rate of the levy is disputed and proceedings are held for its reduction, to consider the payment of the demand while maintaining the rights for a reimbursement at the end of the proceedings. Another advantage of the payment is that if the demand was paid, the authority may not amend the assessment and increase it.

The purchase of a property in Caesarea – legal handling ( Yoav Mozer Adv.);

Upon buying a residential home in Caesarea we perform an initial examination regarding the registration of the seller’s rights in the records of the Land registrar and whether such right is subject to mortgages or foreclosures. If the rights are not registered in the records of the Land Registrar we perform an investigation and examination regarding the location of the registration of the rights and whether the right’s registration is subject to mortgages or foreclosures (an examination with the mortgage registrar, an examination at the court’s terminal etc.). In the second stage we prepare the sale contract which is transferred to us by the seller’s attorney (it is customary that the seller’s attorney prepares the draft of the sale contract)

During this stage of the negotiations we protect in the sale contract the rights of the buyer so that the consideration he pays will assure the removal of all mortgages / foreclosures listed with regard to the seller’s rights, if such exist (such as a mortgage etc.) and will assure that the seller provides all the tax certifications required from him (Betterment tax, sales tax, property tax, certification by the Caesarea Development Corporation and approval of the “Hof Hacarmel” Local Planning and Construction Committee) since without those certificates it is not possible to perform the transfer of rights in the records of the Land Registrar to the name of the buyer.

Additionally; we must assure in the sales contract that a substantial amount of the consideration will assure the delivery of possession in the property to the buyer on the date determined in the contract and we must also determine in the contract a fiduciary apparatus (to which part of the amount of the consideration be transferred) which will assure obtaining the tax certificates within a reasonable period if the possession of the property is delivered to the buyer prior to obtaining all the aforementioned certificates.

At the end of the process and after obtaining all the seller’s tax certificates we actually perform the registration of the rights to the property under the name of the buyer in the records of the Land registrar.

It is the customer in Israel that the advocate performing a real estate transaction receives from his client attorney’s fee derived from the value of the consideration (between 0.5% and 1.5%) and under the circumstances of my professional seniority on one hand and the extent of activity required for the performance of a transaction of purchasing a residential home in Caesarea, an attorney’s fee of 1% of the value of the transaction reasonable and sensible.