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Behind-the-scenes partners By Shay Amit Tags: Israel It's no secret that every transaction involving real estate in Israel has a third partner. It's Big Brother, otherwise known as the Israel Tax Authority. Every deal in which property changes hands must be reported to the authority within 30 or 50 days, depending on the type of transaction, and both parties will owe taxes: The seller needs to pay a betterment tax and the buyer owes purchase tax. The issue at stake is just how much they must pay. A sales agreement that the taxman thinks is unreasonably cheap may not pass muster. The law in this realm states that the land tax manager can dismiss the price agreed on between the parties, for the purposes of calculating betterment or sales taxes. This will occur if the taxman feels that the price does not reflect the true value of the property, based on comparable deals. The land tax offices have the biggest and most up-to-date database in the country on land transactions. Thus all it takes in the age of computerization is a mouse click or two to receive a list of comparable transactions. The law does lay down criteria for the tax authority to decide to dismiss a sales agreement, though we won't expand on that here. Advertisement Some transactions also involve a betterment tax based on building rights added to the property between the time the seller first bought it and the time he or she sells it. For instance, say the buyer bought a piece of land zoned for the construction of 1,000 square meters, but thereafter the master plan of the city was amended and the plot of land is now zoned for 1,500. Now a betterment tax equal to 50% of the value of building rights of 500 square meters will be demanded. Usually, the value of added building rights for the purposes of betterment tax is based on an appraisal by the local planning and construction committee. An appraiser working on behalf of the committee determines the value of the additional construction rights, based on which the tax authority charges the property seller. Of course, the seller may appeal the evaluation and hire an appraiser to provide another opinion. If the two appraisers can't agree, an "arbitrating" appraiser can be hired to set a final sum. This third appraisal is indeed final: The parties may challenge him in court on legal grounds, but not challenge the appraisal itself. On July 15, 2008, the administrative affairs court in Tel Aviv did rule against the decision of a final appraiser (Efrat H. Investments vs the Ramat Gan Planning & Building Committee). This is what happened. A property in Ramat Gan changed hands for $1.2 million. The parties reported the deal to the betterment tax division. It did accept the transaction price, but then matters got sticky. The appraiser on behalf of the selling company ruled that the $1.2 million price indeed matched the market value of the property. But the appraiser on behalf of the Ramat Gan Planning & Building Committee (not the tax authority) thought it was worth four and a half times more. The determining, third appraiser decided that the Ramat Gan appraiser was nearer the mark and determined the tax bill accordingly. However, the selling company protested that decisive evaluation and sued, arguing that it was impossible to set a "virtual" price on the property, as the Ramat Gan appraiser and the final appraiser had done. The seller argued that the amount of taxes demanded had to be based on the market value of the property, as ratified by its own appraiser - and as accepted by the betterment tax people. First of all the court dismissed the Ramat Gan Planning & Building Committee's claim that the argument was over price, and not a legal matter (and therefore didn't warrant the court's attention). Indeed, the court ruled that this certainly was a matter of law. Then the court dismissed the company's position, ruling that the subjective price in a property sales agreement was not the decisive factor in setting betterment tax, even if the land tax authorities hadn't even peeped. The opinion of the final appraiser should be ascribed great weight, ruled Judge Noa Grossman, and the court shouldn't intervene unless he was grossly off the mark. In the case in question, she determined that the final appraiser's decision had bridged the two other positions, factoring in the planning status of the property, and was thus valid. The court is not manned by appraisers and the judge is unlikely to dwell on every comma in the appraisal report. What the court can do is rule on reasonability, or determine if a gross error was made. I, however, believe that when an appraisal is hundreds of percent higher than the value on which basis a transaction is carried out, it is unreasonable, and the court's intervention is warranted - especially when the value for the transaction was accepted by the tax authorities. The author is a partner at the law offices of Shlomo Tessone office, and an expert on property tax. Bookmark to del.icio.us   Beatle terror Islamic militant leader threatens to kill former Beatle, Sir Paul McCartney, over Israel gig. Fugee Fridays Every Friday, volunteers bring donated food from Carmel Market to African refugees.

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