Treasury Mulls Repeal of Tax Exemption on Sale of Residential Investment Property

Move would be part of campaign to rein in increases in housing prices.

The Finance Ministry is considering repealing the current exemption from betterment tax - the tax on net profit from a property sale - on residential real estate purchased for investment purposes.

Ministry sources say investors have recently been returning to the real estate market, in part due to low interest rates. This in turn is again pushing up housing prices. There is some question, however, as to whether legislation could actually be passed on the subject if, as currently seems possible, Knesset elections are held at the beginning of next year.

The exemption is currently available on the sale of a home once every four years to anyone who has more than one house or apartment. If the current exemption were repealed, the sources say, investors would no longer be encouraged by such tax considerations in buying residential real estate. For the time being, no final decision has been made on scrapping the current exemption, but the law could be changed either through a bill specifically dealing with the change or through the Economic Arrangements Bill, the supplementary legislation that would accompany the 2013 budget bill.

As things stand, it is not clear whether an Economic Arrangements Bill on next year's budget will even be submitted for Knesset approval, given the government's difficulties in garnering a coalition majority for a budget. Many political observers expect that when the Knesset reconvenes for its winter session, Prime Minister Benjamin Netanyahu will announce plans to disband the Knesset and go to elections in February or March of next year. Elections must be held by the fall of 2013.

If early elections are called, any bill to eliminate the exemption on betterment taxes on residential investment property would have to wait until a new government is established. This also assumes that the new government would still support such a move, perhaps as part of a wider package of economic measures.

A repeal of the investors' exemption from the betterment tax would be in keeping with policy announced by Finance Minister Yuval Steinitz over a year ago, which was designed to curb the number of investors in the residential real estate market here. Steinitz's proposal, which was known as the "hammer plan" in a reference to hammering down prices, did not move forward due to opposition from Knesset Finance Committee Chairman Moshe Gafni.

Steinitz proposed his plan due to data showing a link between the rise in housing prices between 2009 and 2010 and the activity of investors, who represented more than 30% of home buyers during the period.

After Steinitz announced plans to curb the phenomenon, the proportion of housing purchasers who were buying for investment purposes rather than living in the home themselves declined to 23%, but with the failure of Steinitz's plan to advance toward Knesset passage, investors have again been getting back into the market in larger numbers and housing prices have again been going up.

The price rise has caused major concern among the professional staff at the Finance Ministry, as well as at the Bank of Israel. A change in the law was due to go into effect in January that would have limited the exemption from betterment tax to one sale in eight years rather than the current one in four years.

Due to pressure from Gafni, however, the change to every eight years was repealed. Now, rather than trying to have the eight-year provision reinstated, treasury officials are suggesting that it be scrapped altogether. Another legislative provision, which provides for a betterment tax exemption for the sale of two homes by one individual, is due expire at the end of this year and treasury officials do not intend to renew it.