The Exemption from Land Appreciation Tax on selling - an Entitled Residential Apartment
A sale of an apartment in Israel is a common matter. However, like in any other matter, knowledge in this issue will be useful and can prevent from mistakes to occur.
This manual gives the basic information regarding sale of a residential apartment per the Land Taxation Law. This information can assist in the first phase of the checks and before finalizing a decision on the subject.
There are various occasions and no apartment is similar to another. Therefore, the sequence in this manual in combination with advice from an expert will bring a risk-less decision and wellbeing to the sellers.
The Sequence and Conditions for the Exemption
Preliminary check – Is there appreciation in the sale of the apartment? If there is an appreciation, what is its value? And what is the amount of tax needs to be paid?
And then the following checks should be made:
Is the sold apartment can be considered as an Entitled Residential Apartment?
In case that there is a cause for exemption – Is the family selling the apartment complies with 1 or more of the causes for exemption (there are five causes for exemption). This review includes the most common four causes.
Exclusions – was the sold apartment granted to the family as a present?
A present means the apartment itself, a land or money to fund the purchase.
The sold apartment has construction rights – check and calculation of the tax liability and exemption in respect to the worth of the apartment and to its construction rights that were not utilized yet.
The request for exemption – it should be requested per the procedure and a special form should be filled.
1. The Sold Apartment should be an Entitled Residential Apartment.
This means an apartment that was completed, which is owned or leased by an individual, which is not being used as a stock by the seller. The apartment should be built as one unit using for residence, including physical facilities that indicates on her nature, as: kitchen, a shower, a toilet and at least 51% from its size should “use for residence”. Use for residence means residence, nursery, child day care center, religious class and also no use at all – an empty apartment.
The use for residence should be in one from two periods per the choice of the family selling the apartment:
A. The apartment used for residence continuously during the four years prior the sale or during of full period of its ownership or leasing.
B. The use for residence was during 80% of the time from the 01.01.1998 or from the date of purchase (per the latest) until the day of sale. In this option it's not mandatory that the use for residence will be consecutive.
The family selling the apartment should sell all its rights in it, and it includes all family members, a spouse that were properly married and their unmarried kids until the age of 18.
2. The Causes for Exemption from Land Appreciation Tax.
Per the law there are five causes for exemption. Each family selling its apartment is being examined for its compliance with the terms of each cause for exemption. Compliance with the terms of one cause ensures the exemption (provided there is compliance with the terms of the apartment as said above and with other terms per paragraphs 3 and 4):
A. Cause for Exemption per Section 49B(1) – per this cause, it is possible to sell the apartment in case that in the four years prior to the sale, an exemption from Land Appreciation Tax was not utilized.
As an exception, exempted sales of apartments for residence to a descendant or a spouse that occurred in the period of four years prior to this sale are being “ignored”. There are additional exceptions.
B. Cause for Exemption per Section 49B(2) – per this cause, it is possible to sell the apartment in case that the part of the family selling it is more than 25%, that it's the sole apartment of the family in Israel and in the Area in the sale day and during the four years prior to the sale.
Moreover, it is possible to get an exemption per this cause only if more than 18 months passed since this cause was utilized in a sale of another apartment. The family will be considered as having a “single apartment” for the matter of this cause, also if it has, in addition to the sold apartment, another apartment that its part in it is less than 25%, or if it has another apartment that was rented under the protected lease conditions until the 01.01.1997 or if it has an apartment that was purchased during the 12 months prior to the mentioned sale.
C. Cause for Exemption per Section 49B(5) – per this cause, it is possible to sell the apartment in case that it was accepted as an inheritance from a grandparent, a parent or a spouse. The seller should be a descendant of the deceased or a spouse of the descendant. Moreover, the legator should have only one apartment in his possession on the day that he died, and if he would sell the apartment, he would be entitled for exemption per one of the causes in this chapter.
D. Cause for Exemption per Section 49E – per this cause, it is possible to sell the apartment under the following terms:
It's being sold within 12 months since another apartment, for which an exemption was granted for one of the previous causes, was sold.
It was sold by an Israeli Resident.
Moreover, the family selling the apartment must purchase a new apartment which its value is minimum 75% from the value of the two apartments that were sold. The exemption for the 2nd (sold) apartment will not be granted if the value of the two sold apartments will be higher than 3,256,000 NIS. Moreover, if the value of the two sold apartments is higher than 1,957,000 NIS but less than 3,256,000 NIS the selling family will be liable to tax for that part of the value of the apartment which is higher than 1,957,000 NIS (per its value). * (the values are being updated and should be checked before the sale).
Exclusions – Data from the Law and the Author's Position
After it was determined that the sold apartments complies the definition of Entitled Residential Apartment and the family has one cause for exemption, we need to check how the sold apartment was purchased.
If the apartment was granted as a present, a special check should be done regarding the date when the family will be able to sell it.
If the seller did not live in the apartment regularly and it was accepted from a parent, then the seller will have to wait for 3 years until it can be sold, even if, as said, he complies with all the other terms. If the apartment was accepted from someone else, he will have to wait for 4 years until it can be sold.
In case that the seller did live in the sold apartment regularly, and it was accepted from a parent, he will have to wait for two years until he will be able to sell it. If the seller is married or a single-parent – he will have to wait for a year from the day it was accepted. If the apartment was accepted from someone who is not his parent, the seller will have to wait for 3 years until it can be sold.
There is an importance to the percentage from the area of the apartment that was accepted as a present: if the part of the apartment that was accepted as a present is bigger than 50% from its full size and the seller does not comply with the waiting periods, his tax liability will be calculated based on the full size of the apartment. But, if the part of the apartment that was accepted as a present is lower than 50% from its full size – it does not considered as a present – and no cooling-off period is needed. We should remember that when a lot is being accepted as a present, a calculation of the ratio between the worth of the lot and the worth of the completed home should be done as to the date when the construction will be completed. The ratio should be calculated per the worth of the lot as to the day when the construction was completed in comparison to the worth of the lot including the home. If the ratio is more than 50% and there is no compliance with the waiting periods, the tax liability will be calculated per the full price of the sold apartment. If this ratio is less than 50%, then the sold apartment is not considered as a present and no cooling-off period is needed.
4. Sold Apartment with Rights that were not utilized
After the apartment was checked and all the above mentioned calculations were made, it should be checked if the worth of the sold apartment is affected from additional construction rights that were not utilized until the day of sale. This means that there are construction rights that were not utilized and therefore the worth of the apartment was raised. The increase of the worth of the apartment should be, per my estimation and experience, about 200,000 NIS and above. If its price is affected from these construction rights, the worth of the apartment should be calculated in a special manner and this worth will be the exempted part from the full worth of the apartment including the sold rights. The exempted worth is limited by a floor and a ceiling for each sold apartment. The part of the worth which exceed this ceiling will have tax liability in proportion to the full worth of the apartment.
5. Request for Exemption
The family selling the apartment should request the exemption from the manager of the land taxation office together with the attestation about the sale of the apartment. The request will be filled on a formal form; it should be signed by the seller in the presence of a lawyer or a clerk from the tax office.
In accordance to a temporary order, in addition to the exemption routes outlined in the law, it is possible to sale another three apartments and to gain an exemption from Land Appreciation Tax, as long as the worth of each apartment is not higher than 2.2 million NIS and under additional terms. It is a temporary order that its purpose is to increase sales until the end of 2012. Owners that wish to realize their apartments quickly have a rare opportunity to do so.
Introductory Lectures for the Broad Public
Lecture A – Residential Apartment
The lecture reviews the exempted routes and the preliminary conditions needed for tax exemption on selling of residential apartment, considering also the Temporary Order.
Lecture B – Bequests and Gifts
This lecture reviews basic tax planning that enable transfer of real estate within the family, the consequences of this action on the one that gives, the one that gets and on the future tax or exemption.
Lecture C – Purchase Tax – The Manual
This lecture reviews the Purchase Tax regulations and delivers key data regarding the purchase tax applies for the family upon purchase of an apartment, land, store or other real estate asset in Israel.
Lecture D – National Planning Guidelines 38
This lecture delivers primary data about the tax aspects regarding the owner of the apartment and the entrepreneur in accordance with the Temporary Order. The lecture will also deal with the National Planning Guidelines 38/2.
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Tel: 03-6128358 Fax: 03-7510645
Dorit Gabay, CPA – Pay Less. Legally