Here are several proposed legislative amendments in the field of taxation, primarily in the area of real estate taxation:
Reduction in capital gains tax rate on land purchased before November 2001
Under current law, the capital gains tax on the sale of land purchased before November 2001 is calculated using a weighted linear method, whereby the portion from the date of purchase through November 2001 is taxed at standard tax rates, which often reach 50%, so that in certain cases, the weighted tax rate reaches 45% and possibly even higher.
It is now proposed to enact a temporary provision for a period of three years, during which a tax rate of 25% (before surtax) will apply to the proportionate portion of the period from the date of purchase through November 2001, subject to several conditions, including that, during the 8 years following the purchase, residential units that may be built in accordance with the zoning plan applicable to the land being sold will be constructed on the land.
Calculation of capital gains tax on the sale of an apartment built on historical land
As is known, usually, someone selling a residential apartment today that is not exempt from capital gains tax, the capital gains tax is calculated according to a linear calculation, based on the ratio of the period from January 1, 2014, to the date of sale, compared to the period from the date of purchase to the date of sale. Only on this relative portion is capital gains tax imposed, and the rest of the gain is exempt from capital gains tax.
When the apartment being sold was built by the seller on land previously owned by him, the purchase date for the purpose of determining the aforementioned linear ratio is the date of purchase of the land.
Thus, the seller receives a significant reduction in the tax amount, even for a period when the apartment did not yet exist. The legislator intends to cancel the aforementioned calculation method, so that anyone selling an apartment they built on land they owned before January 1, 2014, and at that date the apartment was not yet built, the aforementioned linear calculation will not apply.
The law is intended to apply only to apartments completed after December 31, 2025.
It is therefore desirable to examine the possibility and feasibility of building the apartment so that it is completed before December 31, 2025, in order to benefit from a favorable linear calculation.
Update on purchase tax rates for purchasing a single apartment
According to the proposed legislation, the purchase tax brackets for acquiring a single residential apartment will be updated, so that those who purchase a single apartment up to a value of NIS 3.1 million will benefit from a reduced purchase tax compared to the existing law.
On the other hand, whoever purchases a single apartment valued above the aforementioned sum will be subject to a higher purchase tax compared to the existing law.
The law will apply to purchases from the determined commencement date onwards.
Shortening the replacement period for home upgraders
According to existing law, someone who purchases a second apartment can sell their first apartment within 24 months of purchasing the second one and enjoy tax benefits (capital gains tax and purchase tax) afforded to owners of a single apartment.
The legislator's intention with the bill is to reduce the period from 24 months to 12 months. .
The scope of the amendment according to the proposal will apply to replacement apartments purchased after the effective date as determined by legislation. It is therefore proposed to consider, in appropriate cases, advancing the purchase of the replacement apartment before the law takes effect.
Cancellation of exemption for foreign residents
As is known, currently the existing exemption (full or partial) from capital gains tax for the sale of a residence, and from income tax for renting out a residential property, is also available, under certain conditions, to non-residents.
It is proposed to exclude foreign residents from the existing exemptions mentioned above, so that they will only apply to residents of Israel.
The start of the law, according to the proposal, is regarding income that will be generated from January 1, 2024, and onwards.
It should be noted that the legislative process may encounter legislative difficulty due to the non-discrimination prohibition established in the tax treaties between the State of Israel and many countries around the world.
Additional tax on a residential apartment
Currently, a surtax at a rate of 3% is imposed on all of an individual’s income exceeding approximately 650,000 NIS per year, however, income from the sale of a residential apartment valued at up to 4.75 million NIS is excluded for the purposes of the surtax.
It is proposed to cancel this exemption so that an additional tax will also be imposed on capital gains from the sale of a residential apartment, provided that it is not exempt from capital gains tax.
Property acquisition tax on a shell apartment
Today, a purchase tax is imposed on the acquisition of a residential apartment even if its construction is not yet completed, if the seller is obligated to finish the construction of the apartment.
There is a legal dispute regarding the law when an apartment is purchased without the seller being obligated to complete the construction, but rather to bring it to a "shell" condition, meaning a partial finish level, and without completing the interior of the apartment.
The legislation proposes amending the section to clarify that a shell apartment will also be subject to purchase tax as a finished apartment.
Cancellation of foreign worker levy
According to a published bill proposal, it is proposed to cancel the levy on salaries paid to foreign workers, for salaries from January 1, 2022, onwards.
On this occasion, we would like to note that there are additional issues that are "on the radar" of the Tax Authority, and the Authority intends to make significant legislative amendments to them, including a reform in the taxation of partnerships and investment funds, changes in international taxation, VAT on the purchase of digital services from international providers, and more.
The information in this circular is provided as a service only and does not constitute binding professional advice.
