Draft Arrangements Law Calls for Israeli Tax Overhaul to Boost Supply of Housing

The government is struggling to contain rising home prices with a host of measures, and is imposing more onerous taxes on property speculators.

Emil Salman

A draft version of the Economic Arrangements Law – the legislation accompanying the budget – contains a host of tax measures directed at the real estate market, with the aim of awarding those who help increase the housing stock and punishing those who delay it.

The draft law proposes awarding tax benefits to those holding land that the government wants developed for residential building. It would offer reduction on tax due on land purchased between 1961 and 2000 so long as 80% of building rights are used to build homes over the four years after it’s sold.

Right now, tax policies discourage long-term land owners from developing or selling because of the tax rate on the increased value of land bought between 1961 and 2000 is very high. The rate was cut to 20% in 2001.

“Removing obstacles to promoting the development of housing on private land through private sector developers is the most efficient way to cope with future crisis,” the law says by way of explaining the tax benefits. “That is because the private sector reacts more quickly to price changes than the government does.”

The government is struggling to contain rising home prices with a host of measures, such as a special program to offer land to contractors so long as they pass along the savings in the form of cheaper homes, and imposing more onerous taxes on property speculators.

After multiple delays, the first cabinet meeting on the 2015-16 budget is slated for Wednesday. A day before that, the economic-social cabinet will meet on reforms and structural changes contained in the Arrangements Law.

The biggest bone of contention right now is over the defense budget, especially after the Locker committee released its recommendations last week that basic defense spending be capped at 59 billion shekels ($15.6 billion) annually for the next five years. The army says that is insufficient and opposes the change Locker is suggesting for pensions and staffing cuts.

Prime Minister Benjamin Netanyahu is due to meet with defense Minister Moshe Ya’alon, who has led the charge against Locker, before the Wednesday meeting to agree on the size of defense appropriations for next year, and on which Locker recommendations will go into the Arrangements Law.

Kahlon, who warned on Wednesday that the army will get less than the 59 billion shekels if it doesn’t consent to the other Locker reforms, will also be at the meeting.

The real estate tax overhaul will also apply to people who hold onto their previous home long after they have bought a new one. Treasury officials say that many homeowners keep their properties in the expectation they can make more while prices rise.

Right now, the tax system doesn’t penalize these homeowners even though they are effectively obstructing supply by leaving their properties unoccupied. So long as they sell the older property within two years of buying the new one, they are not required to pay the purchase tax.

The Arrangements Law would cut the exemption period to just one year.

The law would also exempt people who inherit a second home from paying the property-improvement tax when they sell it, so long as they do so within two years after the death of the original owner. Right now there is no time limit on the exemption.

Under the legislation, local authorities will also get incentives for developing land. They would be exempt from conducting tenders in certain instances for infrastructure work meant to serve projects where 300 or more homes are being built. They would also get the authority to unilaterally redesignate land zoned for commercial and office use to residential. Until now, local planning committees had to approve the changes.

The Arrangements Law also includes special provisions aimed at easing the housing crisis in the Arab sector. It strengthens the powers of local planning committees in Arab municipalities and empowers the finance minister to appoint six new committees for Arab towns by the end of the year, and to name others by 2019.