Capital Gains Tax Rules for Israeli Real Estate Owners: Key Considerations Following Recent Legislative Amendments
Summary
Owners of vacant land who intend to build a residential apartment on it, and owners of real estate assets that were transferred to them from closely held corporations in 2025 who intend to sell those assets, should pay particular attention to the following issues that may materially affect their capital gains tax liability.
- Land purchased before January 1, 2014: Owners of vacant land purchased before January 1, 2014, should consider now when construction of a residential apartment will be completed. An amendment to Israel’s Real Estate Taxation Law limited eligibility for the beneficial linear tax calculation on the sale of a residential apartment built on such land. The benefit will apply only if construction of the apartment is completed by December 31, 2030.
- Sale of a real estate asset transferred by a closely held corporation to its shareholders: If the asset was transferred under the Temporary Order in force in 2025, its owners should carefully examine both the applicable capital gains tax calculation and rate. The regular tax rate that would apply if the asset were sold under different circumstances does not apply in these cases.
- Advance planning: Landowners planning to construct apartments or sell assets transferred from closely held corporations under the circumstances described above should review the applicable tax calculation in advance to avoid unexpected tax exposure.
Beneficial Linear Tax Calculation on the Sale of a Residential Apartment Built on Vacant Land
An individual who sells a qualifying residential apartment and is not entitled to a capital gains tax exemption may benefit from a reduced tax rate if the apartment was acquired before 2014, under the beneficial linear tax calculation. According to this calculation, the real capital gain accrued up to January 1, 2014, is exempt from tax, while the real capital gain accrued from that date until the sale date is subject to capital gains tax at a rate of 25%.
Until 2023, this calculation could generally be used without significant limitation. Accordingly, an individual who acquired vacant land could build a residential apartment on it and benefit from the reduced tax rate on the sale of the apartment, including in respect of the capital gain accrued before its construction.
In 2023, the Real Estate Taxation law was amended to provide that the beneficial linear tax calculation may be used on the sale of a qualifying residential apartment only where one of the following conditions is met:
- A residential apartment stood on the land when it was acquired.
- A residential apartment stood on the land on June 1, 2023.
- Construction of the residential apartment is completed by December 31, 2030.
Particular attention is required where there is currently no residential apartment on the land and the owner enters into a transaction under which one will be constructed, such as a combination transaction or a construction services transaction. In these cases, the construction completion date should be carefully considered. If construction is completed after December 31, 2030, the beneficial linear tax calculation will not be available on the sale of the apartment, and the entire real capital gain will be subject to capital gains tax at a rate of 25%.
Sale of a Real Estate Asset Transferred from a Closely Held Corporation to an Individual
In 2025, a Temporary Order was in force for one year. Subject to certain conditions, it permitted closely held corporations to transfer real estate assets to their shareholders, both as part of the corporation’s liquidation and without its liquidation, with a full exemption from capital gains tax and purchase tax.
In relation to residential apartments, the Temporary Order restricted the availability of personal capital gains tax exemptions on a subsequent sale, including the exemption for a single apartment. It also established special tax rates for the sale of real estate assets transferred under the Temporary Order: 47% on the capital gain accrued from the date the corporation acquired the asset until its transfer to the shareholders, and 25% on the balance of the capital gain, in each case before surtax, where applicable.
Accordingly, where an asset transferred under the Temporary Order is now sold to a third party, it is not sufficient to consider the tax rate that would have applied had the asset been sold under ordinary circumstances. The special tax provisions established under the Temporary Order, including the allocation of the capital gain between the relevant periods, must also be considered.
This calculation is complex and not currently fully supported by tax-calculation software. It must therefore be performed manually, based on a case-by-case review of the relevant property data, including the acquisition date and the date of transfer to the shareholders.
What Should Be Reviewed Now?
- Owners of vacant land: Consider whether construction of the residential apartment can be completed by December 31, 2030. If completion by that date is not feasible, the higher tax burden should be considered when formulating commercial terms.
- Owners of an asset transferred from a closely held corporation: Before selling the asset to a third party, ensure that the tax calculation follows the principles established under the Temporary Order. An early review may prevent inaccurate reporting and reduce exposure to disputes with the Israel Tax Authority.
- In both cases: An early review of the tax implications is essential to reduce unexpected exposure and support business decisions based on a complete understanding of the tax position.
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Adv. Maya Carmi Lubartovski is a partner and head of the firm’s real estate taxation practice.
Barnea Jaffa Lande’s real estate taxation practice provides comprehensive legal advice on tax planning and on the full range of tax issues arising in connection with real estate transactions. This includes complex tax aspects of real estate transactions, urban renewal transactions, combination transactions, consideration-based transactions, sales of residential apartments with building rights, purchasing group transactions, local authority transactions, expropriations, lease agreements, and the dissolution of real estate associations.