Israel May Drop Betterment-tax Exemption for Investors

With the move, Finance Ministry officials seek to put a lid on surging housing prices.

The Finance Ministry's efforts to plug the budget hole without raising taxes has brought betterment-tax exemptions on investment homes back into focus. Treasury officials are split over reviving legislation that has been held up in the Knesset – legislation that would also help cap the rise in housing prices.

Real estate investors are currently exempt from paying tax on profits derived from the sale of homes if no more than one home is sold in any four-year period. Otherwise, the capital gains tax in Israel is 25%. The exemption is one reason investors have been flocking to Israel's real estate market in recent years, fanning house inflation that has been stymying young families.

Since 2011 the treasury has been trying to cool the housing market by encouraging exits by investors, who have accounted for roughly 25% of home purchases. Finance Minister Yuval Steinitz pushed a plan to get investors to sell their homes by the end of last year by broadening the exemption in 2011 and 2012. This would be followed by a cancellation of exemptions this year.

But as the legislation got stuck in the Knesset Finance Committee, housing prices kept climbing. As a result, the treasury's budget department is keen to push the bill, which would also bring in tax money estimated at NIS 100 million each year over seven years.

According to the proposal, investors would be able to designate which home serves as their residence, with all others subject to betterment tax at the time of sale. The tax would be levied based on the period the property was owned when the exemption didn't apply. So if the legislation canceling the exemption takes effect in 2013, an investment home bought in 2008 and sold in 2018 would be subject to tax on its increase in value for half the period.

While some people in the treasury think the legislation would fix a serious distortion, Tax Authority officials say the betterment-tax intake would be negligible since it is levied on net profit after costs – and investors would merely claim more expenses. But others in the treasury say the state would still benefit because claims for expenses would hit the renovations market, where much activity currently goes unreported to the tax authorities.

Yossi Aloni