Tax / Private Clients

Recently, and against the backdrop of the ongoing Israel-Hamas war, there has been an increasing number of diaspora Jews purchasing apartments and properties in Israel. Along with other experts in the field, Liat Keisary, the head of our firm’s Private Clients Department, was interviewed by Ynet for an article on the subject. Liat explained that this trend, along with the weakening of the shekel, is expected to lead to a sharp increase in the purchase of luxury properties in Israel.

Israel’s housing market has been recording dramatic price hikes for a little over a decade. This is a relatively short time frame relative to price hikes of such magnitude. For example, according to the housing price index published by the Israeli Central Bureau of Statistics, housing prices rose last year by the cumulative rate of about 15.2%. In other words, if the price of an average apartment in Israel was about ILS 1.081 million in 2010, by 2020, the average price rose to about ILS 1.58 million. Due to the pace of population growth in Israel, a relatively small country, there is a constant demand for housing, mainly in the central Dan region. Therefore, housing prices are especially high.

These price hikes indeed make Israeli real estate attractive, but they also make every transaction more significant. Therefore, it is imperative buyers not only find the right property for themselves, but also gain an understanding of the stages of purchasing real estate in Israel, Israeli real estate laws, and the most important aspects of real estate transactions in Israel.

Real Estate Taxation in Israel

When buying or selling a residential apartment in Israel, two main types of taxes apply: betterment tax (also known as capital gains tax) and purchase tax. Unless the parties agree otherwise, the buyer of the apartment pays the purchase tax, while the seller of the apartment pays the betterment tax.

The purchase tax rate that applies to the buyer during a real estate transaction depends, inter alia, on the number of apartments he owns at the time of purchase. If this is his only apartment in Israel, the buyer will benefit from an exemption up to the price bracket specified in the Real Estate Taxation Regulations. Above that price, the buyer will pay graduated tax according to that defined in the regulations. If the buyer has more than one apartment, then he has no entitlement to this benefit and will pay a higher property tax rate according to that specified in the regulations.

Taxation of Israeli Residents vs. Foreign Residents

As stated, if the purchased apartment is the buyer’s only apartment and he is a resident of Israel, he can benefit from the exemption and the lower purchase tax brackets. On the other hand, if the purchased apartment is the buyer’s only apartment and he is a foreign resident, then he is not entitled to the exemption or to lower purchase tax. Therefore, he will pay purchase tax at the tax brackets applying to the purchase of a second apartment.

Correct to date, there are two purchase tax brackets that apply to foreign resident purchasers of an apartment in Israel. 8% purchase tax will apply to the portion of the purchase price up to ILS 5,525,070 and 10% purchase tax will apply to any sum exceeding the first ILS 5,525,070.

Stages of Buying a Property in Israel

1. Finding a property. Naturally, the first stage is finding the right property. For the most part, foreign residents tend to prefer location and proximity to the sea over proximity to good schools. The most efficient way to find a property is by engaging with a realtor. Before engaging with a realtor, it is important to ensure he has a valid real estate brokerage license and is fluent in English. As for the timing of payment of the realtor’s fee, the buyer must pay it shortly after signing the agreement, and not on the delivery date of possession of the apartment.
   
   
2. Engaging with an Israeli attorney for representation during the sale transaction. Buying an apartment includes numerous stages and requires professionalism and attention to detail. This is especially true when the buyer is a foreign resident making a remote purchase. Furthermore, the process of buying a property by a foreign resident differs from the process applying to Israeli residents. As a result, it is important to engage with an Israeli attorney who has expertise in this field and experience working with foreign clients. The power of attorney the buyer issues to an Israeli attorney empowers that attorney to assume responsibility for managing all stages of the transaction. This includes from the negotiations stage until the final stage of registering the property under the buyer’s name at the Israel Land Registry. The buyer may decide if to come to Israel personally to sign the documents requiring certification during the transaction, or if to authorize his attorney to do so on his behalf. If the buyer chooses to empower his attorney to act on his behalf, the buyer must sign particular documents at a consulate or a notary public’s office. He must also obtain an apostille certification that legally validates these documents.

   If you are buying an apartment “on paper” from a contractor, it is extremely important to retain professionals during the negotiations stage. They will advise you on the apartment’s specifications, planning, and how to make modifications according to your needs. If you are buying a second-hand apartment, it is important to retain professionals for the purpose of conducting preliminary inspections. These include identifying deficiencies in the apartment and its various systems, examining the need for renovations, measuring the land, checking for building deviations, etc.

3. Opening a bank account or trust account in Israel. The only way to pay a purchase tax bill for a property is through the buyer’s bank account. Therefore, it is very important to open a bank account in Israel. Since the opening of a bank account by a foreign resident is a lengthy process, you should begin this process early and before you sign the purchase agreement.
   
   
4. Closing the transaction. The final stage in closing the transaction is delivering possession of the property against payment of the purchase price and reporting the transaction to the Real Estate Taxation Authority. Buyers do not usually pay the purchase price in a single payment. Attorneys devise payment mechanisms and pay in installments in order both to advance the transaction and to ensure the seller fulfills his obligations. For the most part, the attorney representing the buyer divides the total payment for the property into several stages and makes each payment contingent upon the seller fulfilling a particular obligation. The consideration clauses are critical in the agreement. This is especially true when a foreign resident is carrying out the purchase transaction, as this is not a standard transaction.
   
   
5. Paying the taxes. Another key component of a real estate transaction is paying taxes. Purchase tax is the main tax imposed on a buyer of a property in Israel. This tax varies for Israeli citizens, foreign residents, new immigrants, returning residents, etc., according to the number of properties they own in Israel. Therefore, it is very important to understand which definition is most applicable and beneficial to you and then report this definition to the Real Estate Taxation Authority. Additionally, you must ensure all the details you report are indeed accurate and that you omit no detail when reporting the transaction. For example, if the buyer reports to the Real Estate Taxation Authority that he only has one apartment in Israel, but he actually owns more than one, he risks criminal punishment and the imposition of fines. The buyer must pay purchase tax no later than 60 days after the agreement signing date.
   
   
6. Post-purchase. Once the transaction is complete, it is important to obtain an insurance policy to cover third-party, plumbing, and structural damages. It is also important to issue a perpetual power of attorney for management of the bank account and the apartment in the event of loss of legal competency. You should also draw up a will that solely addresses the bequeathing of properties in Israel.

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Barnea Jaffa Lande’s Private Clients Department has extensive experience helping foreign residents buy apartments and other real estate assets in Israel. We handle all stages of the transaction, from finding the right property to managing it. We would be delighted to be of service to you.

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Many landowners in agricultural communities (moshavim) find themselves wondering about the future of the family farm once they have passed. Questions such as how can the estate be bequeathed, to whom, and what the parties who are not gifted the farm might receive arise frequently in such cases. Because the agricultural farm is the primary asset of these families, the Israel Land Authority decision mandating that only one heir may inherit the farm makes the equitable division of the estate among heirs difficult. There is no doubt that bequeathing an agricultural farm is more complicated than bequeathing an urban real estate property, as it is subject to laws, agreements, protocols, and regulations unique to the agricultural sector in general and to land in particular.

Who May Inherit the Farm?

Currently, based on the language of the new lease agreement for the inheritance of land (in relation to plot A in worker’s moshavs), if the rights holder to the land has died and there are several heirs to the land, the rights shall pass to one of the heirs as agreed upon by the remaining heirs (and if there is no agreement between the heirs, an heir designated by the court, in accordance with the Inheritance Law).

Under the Inheritance Law, the rights to the land shall be conveyed to an heir willing and able to maintain the farm, who must comply with requirements set by Israel Land Council resolutions as well as with Israel Land Authority procedures. Should the heir be ineligible to inherit the land, he must convey the rights to another heir that may take the rights, subject to the lease agreement, ILC resolutions, and ILA procedures.

Thus, currently, a spouse has no inherent entitlement to take control of the farm after the death of a spouse, but rather only a first-in-line right in relation to other heirs. This is if the spouse is willing and able to maintain the agricultural farm.

As a result, one of the possible solutions for solidifying the right of a spouse to inherit the farm is the creation of a mutual will, which grants to each spouse the rights to the farm upon the death of the other spouse. In such cases, according to the ILA’s regulations, the provisions of the will shall prevail, as long as the heir meets the ILA’s requirements.

An interesting case concerning a mutual will for an agricultural farm was considered by the family court in 2013. In that case, the parents executed a mutual will while they were alive, whereby one of their daughters would receive their rights to the agricultural farm, as long as that daughter became the caregiver of their other daughter. Sadly, after the father’s death, the daughter designated to inherit the farm was murdered and the mother executed a new will in which she bequeathed the farm to her granddaughter, who was not the daughter of the murdered daughter, in contradiction of the mutual will signed by the father before his death.

After considering the relevant factors, the court ruled that the latter will should be held valid, because, inter alia, at the time of his death the father could not have bequeathed the farm to anyone who was not his spouse under the agreement between the moshav community and the ILA. In addition, the implicit intent of the parents in the will was to bequeath the farm to their daughter under the condition that she care for the other daughter, a condition that could not materialize under the tragic circumstances of the case.

What May Additional Heirs Who Do Not Inherit the Farm Receive?

The Inheritance Law stipulates that the heir who receives the farm shall compensate the other heirs to the extent that the value of the farm exceeds his share of the estate.

As we know, the sale of an agricultural farm is generally not profitable since most of the funds paid by the buyers are ultimately used to cover mandatory fees and taxes, such as purchase fees, sales tax, VAT, agreement fees, betterment tax and fees, old debts, building irregularities, and irregular use fees.

While an inheritance is not considered a tax event, the trend in case law is that heirs who receive monetary compensation (rather than the farm itself) shall be subject to full taxation for the farm as early as the date of inheritance. In other words, assuming the rate of the mandatory fees and taxes listed above amounts for a particular farm to 70%, the additional heir (who does not receive the rights to the farm) shall receive about 50% of the gross share of the farm, which is only about 15%!

The heir who inherits the farm, on the other hand, has the right to reside on the farm for life, which on its face equals more than 15% of the value of the farm, and shall pay the mandatory fees and taxes only upon the sale of the farm.

How to Equally Distribute the Farm among Heirs

One possible solution for preventing inequality between heirs is establishing the rights to the residential plot by signing a lease agreement in accordance with the resolutions of the Israel Land Council, which eliminates the need for engaging with the ILA. An even more advanced solution is the purchase of all the residential rights to the farm, which constitutes a significant step toward ownership of the farm's residential plot. (In conflict areas and the Gaza envelope, where discount rates apply, a purchase is far more profitable.)

Anchoring the rights provides a real possibility for passing the farm on to the next generation by adding a third home on the land and eliminating the need for intergenerational succession, between parent and child, and thus the possibility for splitting up to two plots (according to the community building plans). This option allows for partial realization of the land, according to need and circumstance, and reduces the overall tax liability.

In the event of a plot being split for purposes of sale, construction of a residential home on the divided plot prior to its sale allows for reducing betterment tax upon sale even further (and in certain instances the buyer’s purchase tax, too).

Consequently, dividing the farm between more than one heir, along with executing a will and family agreements while all family members are still alive, prevents a situation of only one heir taking control of the entire farm, while harming the other heirs who would only receive low compensation. Dividing the farm may also significantly reduce inheritance tax liability, as the compensation the heir of the farm would pay will be calculated only according to the costs of the division.

Conclusion

The decision on how to bequeath a farm poses a difficult challenge for farm owners. The goal should be to make a decision that causes the least harm to family relationships and dynamics, and which prevents rivalries and disputes between family members.

Proper planning of the farm's future, by executing a will customized to the specific farm and its heirs and taking action to divide the land to plots while still alive, allows for a more equal distribution of the farm, reduces heirs' tax liabilities, and helps preserve the fabric of family relationships even after we are gone.

Source: barlaw.co.il