Prenuptial Agreements – New Israeli Supreme Court Ruling
Up until now, the Israel Tax Authority interpreted the Real Estate Taxation Law so that spouses who signed a prenuptial agreement and maintained separate property were considered a single family unit for the purposes of real estate tax. Furthermore, it imposed on such a couple the burden of proving it was maintaining separate property. The Israeli Supreme Court’s latest ruling in this regard attempts to adapt the law to reality and is not sparing in its criticism of the ITA’s interpretation. Will this ruling put an end to this illogical policy?
The Israeli Supreme Court handed down a ruling this week rejecting the ITA’s position whereby the signing of a prenuptial agreement and the maintaining of separate property between spouses have no bearing on the purchase tax or betterment tax to be paid when a couple executes a joint real estate transaction.
Up until this ruling, the ITA relied on the provision of the Real Estate Taxation (Betterment and Purchase) Law that deems a couple (and its minor children) a single economic unit. As a result, when executing a real estate transaction, a couple must pay taxes as if it were a single seller or buyer, regardless of whether or not the couple signed a prenuptial agreement regulating the separation of property between the spouses.
Absurd situations arose as a result. For example, take a husband/wife with an apartment that he/she purchased or received as a gift prior to the marriage. The couple signs a prenuptial agreement regulating the separation of property between it during the marriage, as well as in the event of divorce, and prescribes that the apartment belonging to the spouse prior to the marriage remains solely under that spouse’s ownership. The agreement clarifies that, in the event of divorce, the other spouse will not have any rights to that apartment.
When that couple then wants to jointly buy an apartment and register the title to the apartment under both spouses’ names equally, logic dictates that the spouse who already holds the title to one apartment that the prenuptial agreement excluded from the joint property will pay purchase tax on half of the new apartment according to the second-residence tax brackets, while the other spouse, who does not own an apartment, will pay purchase tax on half of the new apartment according to the single-residence tax brackets.
It appears the ITA was oblivious to this basic logic, since, as stated, according to its position, if a couple purchases a new apartment to be registered under both spouses’ names, it will be charged purchase tax according to the second-apartment tax brackets, even though the aforesaid couple signed a prenuptial agreement regulating full separation of property.
There were two recent cases of couples buying an apartment when one of the spouses already wholly owned one apartment and the couple maintained a separation of property. The ITA ruled that both spouses were required to pay full property tax according to the tax brackets applying to the purchase of a second residence. These couples appealed the tax assessment to the appeals committee. The appeals committee accepted the couples’ argument and ruled that they should pay the tax separately, each according to the property that he/she owns. Namely, the spouse who already owns an apartment will pay purchase tax according to the tax brackets applying to a second residence, while the spouse who does not own a second residence will be entitled to the benefit due as a buyer of a first residence.
The ITA did not accept the appeals committee’s ruling and appealed to the Supreme Court. In the ITA’s appeal, Justice Ofer Grosskopf (and Justice Yosef Elron, against the minority position of Justice Neal Hendel) ruled that, as long as separation of property is prescribed in a prenuptial agreement and is actually maintained in a manner that rules out its classification as fictitious or artificial, it must be recognized by default and the burden of proving otherwise is imposed on the ITA. This applies even if the couple lives together, runs a joint household, and does not maintain separate income and expenses. Thus, the Supreme Court justices ruled that “partial” separation of property relating solely to ownership of real estate assets is sufficient, while simply living together as a single family unit is insufficient to negate the separation of property (and the tax benefits deriving from it).
In his ruling, Justice Grosskopf criticized both the legislative authority and the ITA and appealed to them to rescind the “family unit” rule (or, to quote the justice, “the marriage fine”) that deems married couples as a single economic unit for tax purposes, and to replace it with a fairer arrangement compatible with today’s reality.
The significance of this ruling is savings of tens of thousands of shekels for couples who signed prenuptial agreements where one of the spouses owns more than one residence.