Chapter 12: Getting the Best Tax Rate on Your Apartment
There are in principle no exceptions to the responsibility to pay taxes, and the rates of taxes for real estate transactions are published transparently and updated regularly by the Israel Tax Authority. However, the rate you end up paying could be dependent on various factors, such as if you qualify for tax relief, or if you currently are, or plan to become, a resident of Israel. For certain types of tax, a request for exemption can be submitted to the Israel Tax Authority by you or by your Israeli lawyer.
It should be noted that the legal framework governing Israeli tax law changed in 2014. Before then, Israeli citizens were entitled to receive tax relief when buying a property even if they were not residing in Israel. After that point, tax reliefs were given to Israeli residents only (even if they are not Israeli citizens). The new framework has imbued new weight to the matter of domicile when planning tax solutions because if it can be proven that the center of your life is in Israel, you are now more likely to qualify for a form of tax exemption.
Additionally, it should be noted that it is still relatively easy and straightforward for a foreigner to buy property in Israel, although the documentation packet required by the Israeli Tax Authority is now different for a foreigner and Israeli resident.
Today, there are four types of taxes that are most likely to be applicable in the case of a property transaction in Israel. The first and most significant one is the acquisition tax (or purchase tax), which is a tax applied to the buyer amounting to a marginal fee of the value of the purchase. The cheaper the price of the apartment, the lower the tax rate will be. The top rate is 10%. New immigrants to Israel and first-time apartment buyers that fit specific profile requirements are entitled to lower rates. In general, however, there are no exemptions on this tax; moreover, the deed to a newly bought apartment may not be registered under your name if the acquisition tax has not yet been paid to the government.
The second type of tax is the capital gains tax, imposed on the seller of an apartment, and relatively correlating with the amount by which the value of the apartment has increased during the time the seller has owned the apartment. However, this tax is not irrelevant to you as a buyer. Due to recent changes in Israeli law, exemptions on capital gains tax are now easier to obtain for sellers, and it is recommended to consult your lawyer on ways to avoid allowing the seller to use the capital gains tax to justify increasing the price of the apartment.
The third type of tax is the local municipal tax, or arnona, which must be paid to the local municipality continuously on a monthly basis, and is based on an apartment’s size and the desirability of its location with the municipality. Certain full or partial exemptions can be sought for arnona, such as for religious and cultural facilities, or being based on exceptional socioeconomic status.
The fourth kind of tax, income tax, is paid on income generated from the apartment, such as rental income. Note that a recent amendment to the income tax law allows Israeli residents who own only one apartment, which is rented for residential purposes, to offset the rent they pay personally against the rental income from their apartment.