Revenues From Betterment Tax Are Less Than NIS 200 Million a Year

The state offers housing investors a de facto tax exemption on their profits, according to Tax Authority figures. This year the state has collected just NIS 150 million from betterment tax - the tax levied on capital gains from real estate - 26% less than the first six months of 2008.

But the most notable detail is that most of this amount came from business real estate, while just NIS 120 million to NIS 150 million came from betterment tax paid by private investors in housing. In annualized terms, the state stands to collect less than NIS 200 million from betterment tax on housing sales - a negligible amount by any yardstick.

The minuscule revenue from betterment tax on apartments for investment shows the tax to be ineffective. Betterment tax is levied only on housing purchases for investment purposes (defined as a property acquired to generate rental income, in addition to a property owned for residence), and exemptions are available if the property is held for more than four years.

It's simple then to avoid paying betterment tax. In practice, most people who buy a home for investment sell less often than once every four years, saving themselves the expense.

According to State Revenue Administration data, housing investors are in the higher earning deciles with an average annual income of NIS 200,000. So high income investors are enjoying a tax exemption, while middle-class investments, like savings plans for instance, are being taxed.

One-third of all apartments purchased in Israel since the beginning of 2009 were bought as an investment. The revenue administration links the blooming market for real estate investments to recent changes in the tax structure that in effect created a preference for housing investments to other opportunities.

Housing investors do pay a tax on their investment - purchase tax. But this tax is based on the sale price and does not reflect the profit derived from it. So, purchase tax is considered less equitable than betterment tax.

During the debate over the 2009-2010 state budget the government concluded that the tax structure on real estate should be reconsidered. The aim was apparently to make betterment tax more effective, to collect taxes from investment profits in exchange for alleviating purchase tax. However, av spokeswoman for the Tax Authority told TheMarker that no progress has been made.