Watch Out, Home Sellers, You Could Be Liable for Tax

New rules that put an end to the old, nearly blanket exemption on the property-betterment tax could find you liable starting January 1.

The Economic Arrangements Law passed by the Knesset in August brought about a revolution in real estate tax legislation. The consensus against the tax exemption for investors and luxury homes led to its cancellation, but the new regulations also produced some casualties along the way.

Israelis have become accustomed to enjoying the exemption, but anyone owning more than one home will be taxed on its sale starting January 1. Until now everyone, not just tax experts, knew enough to claim the exemption if they hadn’t sold another home in the previous four years. The traditional exemption, anchored in clause 49b-1 of the law, had an enormous effect on investing in homes in Israel. So with four words of sheer poetry the revolution was proclaimed: “Clause 49b-1 is void.”

From now on we will have to pay a property-betterment tax when selling our homes even if we hadn’t sold another one during the previous four years, and only because we own a tiny extra pad in Tel Aviv’s Florentine neighborhood. The price of our home once again isn’t what we’ll pocket.

What home sales are exempt?

First of all a single home, on condition that the seller owned it at least 18 months and hadn’t sold another under an exemption. The new coveted status goes to owners of a single residential property home. This status remains intact even if the owner owns another home, as long as it is serving as a replacement for the home being sold within 18 months, is rented out to a protected tenant, his or her share in it is less than one third of the property, or the home was inherited. The exemption, in any case, is limited to a ceiling of NIS 4.5 million. Any amount beyond that is taxable.

The second category is inherited homes. Clause 49b-5 remains in force and exempts the sale of a home acquired through inheritance from a parent, or from a spouse as long as it served as their only home – and only if an exemption would have applied had the spouse sold it. There is also a one-time exemption on selling two small homes at a combined price no higher than NIS 986,000 for the purpose of buying a third home, which is subject to certain conditions.

Everyone else will be charged tax on selling a home – whether small or large, for living in or for investment: everything. How much will we pay? The good news is that it is an improvement over the tax in force before the amendment. Tax on a home without an exemption could reach 42% of its value appreciation in the past. The new tax is gentler, with only a fraction of the appreciation subject to tax based on the time elapsed between January 1, 2014 and the sale, to be divided by the total length of time the seller owned the property.

The entire formula is contained in four basic math calculations:

The first factor is appreciation: the sales price minus the price at which the property was purchased. The second is the relevant portion: the period between January 1, 2014 and the sale as a fraction of the period between the purchase and the sale (the number of years elapsed since 2014 divided by the number of years of ownership).

The relevant portion (B) is multiplied by the amount of appreciation (A), and the result is the amount of appreciation that is taxable.

The rate of tax paid on the taxable appreciation is up to 25%. For example, a home bought for NIS 1 million on January 1, 2009 and sold for NIS 1.3 million on December 31, 2014 appreciated in value by NIS 300,000, but the relevant portion is one year out of six, or one-sixth, of the NIS 300,000 appreciation. That comes out to NIS 50,000, and this is the amount that is taxable. Assuming a 25% tax rate, the tax bill will end up NIS 12,500.

So, can you sell several homes at once and just pay the lower rate? Not really. The Finance Ministry wanted to prevent possible massive exploitation of the new tax rate, so a transition period was established in which the right to sell at this rate is limited to just two homes, and only on condition that one would have been exempt under clause 49b-1 had it not been voided. Starting from January 1, 2018 it will be possible to sell any number of homes at the new rate when the amount of tax will already be quite significant.

What about selling one home at the reduced rate and the second with the single home exemption? It won’t work. During the transition period there is no single home exemption for anyone who owned more than one home at the beginning of 2014.

So perhaps one home can be can transferred as a gift in order to begin 2014 as the owner of a single home, and the home given as a gift can be sold as a single home by the recipient? It won’t work. During the transition period anyone having given a home as a gift will be considered the seller. Besides, homes given as gifts are subject to a cooling off period. Even if this is the only home serving the recipient, he’ll be entitled to the exemption only four years after receiving it – and only if he lived in it for three years.

To sum up, starting in 2014 the exemption on the sale of a home will be given only to the owner of a single home (or on an inherited home or two small homes exchanged for one larger home). A seller owning one home will also be taxed on any amount exceeding NIS 4.5 million. There won’t be any exemption during the transition period for anyone owning two or more homes on January 1, 2014. Tax will be collected at a reduced rate of up to 25% of the amount of appreciation (between January 1, 2014 and the date of sale), be divided by the total length of time the seller owned the property.

Starting January 1, 2018 the reduced tax rate will apply to any number of homes sold by the same owner. The right to be taxed at the reduced rate in the near term is limited to just two homes, but only if one would have been exempt before the amendment.

So what can you do? Plan ahead. Depending on whether you want to sell and when, calculate which home will be subject to less tax. If you want to start 2014 with just one home, you can sell the other – or give it as a gift and then wait for it to be sold after the beginning of 2018.

Anyone who in any case planned to sell a home shortly and either owns more than one home or is selling a home worth over NIS 4.5 million needs to hurry while the exemption still applies until the end of 2013.

The writer is an attorney whose office specializes in real estate and property taxes.

Nothing written here should be construed as legal advice and each case must be examined on its own merits.

Limor Edrey