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The Income Tax Authority has decided to reduce the exemption on betterment tax applicable to luxury apartments, tax commissioner Jcky Matza told TheMarker. The exemption will be terminated in 2007.

Reducing the betterment tax applying to the seller should add a billion shekels to state tax revenue a year, Matza estimates.

The move follows a report from the International Monetary Fund, which recommended that the Income Tax Authority scale back tax exemptions, that are costing the state a combined NIS 31 billion a year. The state budget, for the sake of comparison, for the year 2006 was is NIS 271 billion.

One of the biggest exemptions in the system involves betterment tax (mas shevach) on the sale of residential apartments, no more often than once every four years.

This exemption has cost the state NIS 2.3 billion a year, Matza says.

The exemption applied to anybody selling the apartment in which he lived, and making a capital gain on the sale because its value had increased. As things stand, that capital gain is exempt from tax, but it won't be from next year, apparently. However, sellers could only exploit the loophole once every four years. Sell another flat within that time frame - and you pay the full tax on the capital gain.

The exemption on betterment tax was designed to help the public move from one apartment to another, for instance because the family is growing. Moving involved heavy tax in the past, which made it very tough on families hoping to improve their standard of living. However, the taxman clapped a four-year term on the break, to preserve its intention of helping home-buyers, not people buying and selling apartments for investment purposes.

Furthermore, until now the exemption has not been limited in sum. If one owned a luxury house that increased by millions in value by its sale, the exemption still applied. By the same token, farming land rezoned for housing could be sold at a huge profit, and the exemption applies.

That was not the intention of the regulator, Matza says: during 2007, the ITA will set a cap on the exemption. If the capital gain from the sale of the apartment is higher than the cap, tax will be owed. But the taxman hasn't yet decided whether tax will be owed on the whole of the gain or just the difference.