Last update - 00:00 16/08/2007
Historic properties to surge in price on betterment tax reform
By Avi Bar-Eli
The Tax Authority has a surprise hidden in the 2008 budget. Along with cancelling sales tax and cutting purchase tax on real estate deals, the government this week approved a hike of 'historic tax' on real estate transactions.
Tax breaks on betterment tax , benefiting owners of property built before 1960, will gradually be abolished.
The repercussions of the amendment are especially relevant to the agricultural sector (moshavim and kibbutzim) and their heirs, who can be expected to scramble to sell their properties this year. An incremental increase of the historic tax on businesses was approved two years ago. However, this clause did not apply to individual property owners.
Betterment tax is levied on the sale of almost all real estate properties in Israel, based on the difference between the price of the purchase and the price of sale plus auxiliary costs in the purchase or betterment of the property.
The 2001 income tax reform sets betterment tax on property acquired after 2001 at 20 percent, and 48 percent for property purchased between 1960 and 2001. Property purchased prior to 1948 will be subject to a 12 percent tax, and 1 percent more for every year later, up to 24 percent.
The Tax Authority introduced a section to the 2008 budget which calls for the gradual cancellation of tax breaks provided to owners of property acquired in 1960 or earlier, because of the distortion created between this set of property owners and others.
According to the decision, betterment tax levied on historical property owners will increase by 2 percent in 2009, stretching from 14 percent on transactions involving property acquired before 1948 to 26 percent on the sale of property purchased in 1960. From 2010 on, tax will increase by 1 percent annually.
Because the accumulated capital gain on such properties is relatively large, and in light of the rising prices of real estate in Israel, the tax increase spells an extra tens of thousands and even hundreds of thousands of shekels to the tax authorities.
Adv. Moshe Mizrahi, former legal counsel to the tax commissioner, said that unsuccessful attempts have been made to pass such an amendment, and its approval undoubtedly results in amendments in tax planning, and certainly to the acceleration of real estate deals in order to save on taxes.