Israel: Everything to Know about the Purchase Tax Hike on Real Estate Investors

Barnea Jaffa Lande & Co.
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Last week, the Israeli Ministry of Finance approved the outline for a hike to the purchase tax imposed on real estate investors, once again, to tax brackets of 8% and 10%. The ministry’s goal is to “dissuade” investors from purchasing investment apartments and lower the demands in the residential housing market.

The government pushed the tax hike into an expedited legislation proceeding with a minimal time frame for public comments in an attempt to prevent investors from rushing to buy apartments before the regulations come into effect.

As you may recall, at the end of June 2015, then Minister of Finance Moshe Kahlon decided to hike the purchase tax on real estate investors to brackets of 8% and 10%, with the rationale that this course of action would “deter” investors. As a result of the COVID-19 crisis, in July 2020, then Minister of Finance Israel Katz lowered the tax imposed on investors to its previous rates (i.e., to tax brackets starting at 5%).

According to the new draft bill, which resembles Kahlon’s strategy from 2015, the purchase tax on a second residential apartment will be 8% from the first shekel, up to a purchase price of ILS 5,348,565. If an apartment costs more than ILS 5,348,565, the tax imposed on that portion exceeding the aforesaid purchase price will be 10%.

The Economics Department of the Ministry of Finance recently published a residential real estate review. It shows that, in July 2021, investors purchased about 2.6 thousand apartments, three times higher than the lowest level recorded in July 2020 and 80% higher than in July 2019. It is evident the surge in real estate prices since last year is mainly being “blamed” on the lowering of the purchase tax rates imposed on real estate investors.

However, the ministry’s report also shows that investors are not just scooping up apartments, but also selling apartments. Therefore, in the final analysis, the stock of apartments investors are holding has not changed much, so it may be they are not the main cause of rising apartment prices.

Experience has taught us that reducing investor activity in the real estate market by hiking purchase tax on investment apartments does not help to lower apartment prices, which, contrary to projections, continued rising even after the tax hike back in 2015.

Furthermore, there was also a shortage of rental housing between 2015 and 2020. Since the supply of rental apartments in the market is low in any case, the purchase tax hike caused rents to rise significantly. In fact, the people who are hurt the most by this course of action are those lacking the financial resources to put down the initial capital enabling them to buy an apartment and are thus dependent on the rental housing market. On the other hand, for investors who have the financial resources to buy a second apartment, the tax hike will not be a major consideration in their decisions, since those investors will eventually pass their excess costs onto their tenants.

The upside from reinstating the hike in purchase tax imposed on real estate investors will be immeasurably smaller than the downside caused to the state’s coffers, to the real estate market, and to apartment renters in Israel resulting from the repeat attempt to push investors out of the local market.

Foreign and local real estate investors are an extremely important component of the housing market in Israel. They are a positive factor in a robust and vibrant real estate market. They pump billions into the state’s coffers and increase the supply of rental apartments, which, in turn, curbs the uptrend in rents. It would have been preferable had the Ministry of Finance given these factors all due consideration before deciding to hike the tax rate again.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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