Class Action: Depreciation from Apartment Purchase Value

The Tel Aviv Administrative Court recently ruled that the Israel Tax Authority (ITA) acted unlawfully and without authority when it deducted depreciation from the value of apartment purchases. This ruling applies to instances in which apartment owners sold residential apartments they were renting to tenants under an exemption from paying income tax on their rent income. The ITA’s deduction of depreciation reduced the value of the apartment purchase and increased the capital gains tax. This practice originated from an internal ITA procedure dating back to 2007 but has no anchor in relevant legislation.

Motion to Certify a Class Action

The ITA’s actions led to the filing of a motion to certify a class action against it with the Administrative Court.

Class Action Certified

The Administration Court accepted the plaintiffs’ motion to certify the action as a class action in 2021. After the ITA’s appeal failed, the court began deliberating the class action.

In May 2024, the Administrative Court issued its ruling. It found that the ITA acted unlawfully and without authority when it deducted depreciation from the value of the apartment purchases.

The significance of this ruling is that capital gains tax payments will be lower in the future. It also means that anyone who already paid the tax overcharge will receive a refund.

The Ruling’s Applicability

The ruling applies to the class of residential apartment sellers who fulfill all of the following conditions:

• They rented out their apartments for residential use and received an income tax exemption pursuant to the law prescribing the exemption.
• They sold their apartments between January 20, 2018, and February 28, 2023.
• The Israel Tax Authority deducted depreciation from the value of the apartment purchase in its calculation of their capital gain from the sale of the apartment.
• They actually paid the capital gains tax according to the assessment issued to them.

In his ruling, the judge noted his rationale for certifying the class action and for rejecting the ITA’s position.

He determined the ITA was relying on the erroneous position that failure to deduct depreciation led to a double tax benefit. The ITA claimed this double benefit stemmed from the income tax exemption and from not deducting depreciation from the apartment’s value. The judge, however, ruled this was not a double benefit. According to his reasoning, a taxpayer renting out a tax-exempt apartment should not be deemed to have deducted depreciation. Therefore, deducting depreciation from the apartment’s value upon its sale erodes the exemption and contradicts its purpose.

Tax Refunds

This ruling has serious repercussions for the State coffers. That includes tax refunds totaling tens of millions of shekels and the loss of future capital gains tax revenues from apartment sales. Thus, the ITA announced that it intends to recommend that the Attorney General’s Office appeal the ruling and file a motion for a stay of execution until completion of the appeal process.

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Barnea Jaffa Lande’s Tax Department offers expertise in tax aspects of  real estate taxation.

Adv. Maya Carmi Lubartovski is an associate in the department and heads the firm’s real estate taxation practice.