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As Prices Rise, Gov't to Allow More Homebuyers to Skirt Tax

. Most first-time buyers (such as young couples ) in the periphery are exempt from tax even at the current levels, but people buying in Jerusalem, Tel Aviv and the center of the country often wind up paying tax on their first apartment.

Home prices have been rising for years. Now the government is responding by raising the the ceiling for exemption from purchase taxes.

This is particularly significant for people in the center of the country. Most first-time buyers (such as young couples ) in the periphery are exempt from tax even at the current levels, but people buying in Jerusalem, Tel Aviv and the center of the country often wind up paying tax on their first apartment.

steinitz - February 9 2011

The amendment is intended to make homes more affordable for first-time buyers. With that goal in mind, the bill includes clauses increasing tax for purchasing investment homes; this would push investors out of the market. There are also clauses for lowering tax for selling investment homes, to raise the supply of available homes.

The Knesset Finance Committee approved a bill yesterday extending the exemption to more expensive homes.

Until now, the exemption had been for homes worth NIS 1.14 million and less. The amendment would extend the exemption to NIS 1.35 million.

The Finance Ministry estimates that changing the tax bracket will cost the state NIS 110 million a year in lost revenue.

Now that it has committee approval, the bill is expected to be brought to the Knesset for a second and third reading soon, after which it would become law.

Under the new regulations, people who own one home would pay no purchase tax on homes bought for less than NIS 1.35 million. Between NIS 1.35 million and NIS 1.6 million the marginal tax would be 3.5%, and after NIS 1.6 million it would be 5%.

The bill stems from a compromise between the Finance Ministry and Finance Committee Chairman Moshe Gafni, who had wanted to raise the exemption even further, to NIS 1.6 million.

Currently, buyers pay a marginal 3.5% tax on homes bought for between NIS 1.14 million and NIS 1.6 million, and a marginal 5% beyond NIS 1.6 million.

Taxes also are being increased for investors, who are defined as people with at least two homes. Investors will pay 5% for homes worth up to NIS 1 million, 6% between NIS 1 million and NIS 3 million, and 7% beyond that. The tax increases will not be applied retroactively.

In addition, investors will be granted an exemption from betterment tax on homes sold for up to NIS 2.2 million. The exemption will apply to up to two homes and for the next two years.

During the discussion, the Finance Ministry said the bill aimed to increase the supply of homes available to young couples and to ensure that 8,000 of them would not pay tax on their first home.

But Finance Ministry officials are split on the measure. A week ago, State Revenue Department head Frida Israeli wrote a letter to Gafni stating that his committee was using unclear data or relying on specific cases that were not representative.

Even under the current tax brackets, 76% of young couples did not pay tax on homes they bought in 2010, she said in the letter. In addition, 60% of people who were upgrading to a more expensive home did not pay tax, she wrote. All these people bought homes for under NIS 1.14 million.

Young couples who bought their first home in 2010 paid an average of NIS 928,000. There were three regions where they paid more than NIS 1.14 million, on average: In Tel Aviv, where the average home purchased by young couples cost NIS 1.4 million; in the region of Ra'anana, Ramat Hasharon, Kfar Sava, Herzliya and Netanya, where they paid NIS 1.35 million on average; and in Jerusalem, where they paid NIS 1.2 million.

In the periphery, which includes the Negev, the Galilee, Haifa, the Shfela and Hadera, a full 80% of buyers did not pay tax. In the Shfela, which includes Rehovot, Rishon Letzion, Modi'in, Ramle, Lod and Yavneh, 77% of buyers did not pay tax.

In the center of the country - Petah Tikva, Ramat Gan, Givatayim, Bnei Brak and Yehud - 66% of young couples did not pay tax. In Tel Aviv, around 60% did not pay tax.

Israeli argued that the current brackets, which exempt three-quarters of young couples from purchase tax, is appropriate.

Finance Minister Yuval Steinitz argued that changing the brackets would make it easier for young couples to buy. "Raising the exemption will help thousands of middle-class couples from both the center and the periphery," he said.