Israel: Improved Purchase Tax Benefit for New Immigrants

New immigrants to Israel who purchase a first residence will pay significantly lower purchase tax rates than the tax payable according to the current benefit, after the Knesset Finance Committee recently approved an amendment to purchase tax regulations in this regard.

The Tax Benefit Prior to the Amendment

New immigrants could purchase rights in real estate and pay purchase tax at brackets of 0.5% up to a value of ILS 1,988,090 (correct to 2024), and 5% on the remaining value of the acquired right, provided they purchased the rights during the period between one year prior to their initial entry into Israel and seven years thereafter.

The current benefit applies only to purchases of particular types of rights:

• A residence or a dual-purpose property used for the immigrant’s residence and business.
• ŸA business, including a farm, that the immigrant or his or her relative use for their livelihood.
• ŸVacant land (under particular conditions) for the purpose of constructing a residence or a business.

New immigrants may receive the benefit once for a residence and once for a business. The benefit is also viable in instances where spouses jointly purchase the rights, but only one of them immigrated to Israel.

What Was the Reason for the Amendment?

The Israel Tax Authority (ITA) presented data to the Knesset Finance Committee demonstrating that very few new immigrants used the existing benefit when purchasing a first residence. This occurred because using the purchase tax brackets for a first residence, which are available to all Israeli residents purchasing a first residence, resulted in a lower tax outcome. As an example, the ITA presented a case of a new immigrant purchasing a first residence at the value of about ILS 4 million. According to the purchase tax brackets for a first residence, that same immigrant would pay purchase tax totaling about ILS 96,000. If the immigrant used the existing tax benefit for new immigrants, he or she would pay purchase tax totaling about ILS 111,000.

The Tax Benefit Subsequent to the Amendment

The Knesset Finance Committee approved the draft regulations in order to improve the tax benefit to immigrants and thereby encourage immigration. However, the committee approved the purchase tax benefit for purchasing only two types of rights, a residence and a business, and cancelled the benefit when purchasing land for the purpose of constructing a residence or a business. Additionally, the tax benefit for purchasing a business is now separate from the tax benefit for purchasing a residence. The old tax arrangement for business remains in effect.

The most significant amendment is the purchase tax benefit to new immigrants who are purchasing a property as their only residence. In this instance, new immigrants will pay purchase tax according to the following brackets (correct to 2024): tax exemption up to a value of ILS 1,978,745 (like for any Israeli who purchases a property as a sole residence); above this sum and up to about  ILS 6 million, the purchase tax is only 0.5%; and, above about  ILS 6 million, the usual tax brackets that apply to the purchase of a first residence will apply.

Furthermore, if the value of the residence exceeds ILS 20 million, a tax benefit to immigrants will not apply at all.

Using the ITA’s example, an immigrant who purchases a first residence for ILS 4 million will pay purchase tax of only about ILS 10,000. This is dramatically lower than the tax the immigrant would have paid had he or she used the purchase tax benefit of a first residence prior to the amendment.

The Fine Print

Prior to the amendment, the purchase tax benefit for a residence was limited to a residence purchased for use as the immigrant’s residence. In the newly approved version, deleted the words “for the immigrant’s residence.” As a result, an immigrant can now purchase an apartment and then rent it out or leave the country, without affecting the receipt of the benefit. During a subsequent committee meeting, the ITA asked to return the words it claimed were mistakenly omitted. The committee chairman, MK Moshe Gafni, strongly objected. At the end of the meeting, the committee decided to discuss this matter separately.

When Will the Amended Regulations Come into Effect?

The amended regulations will come into effect in August 2024 and will apply to new immigrants who purchase a residence after such date. Furthermore, people who immigrated to Israel before the amended regulations come into effect, but who have not yet purchased a residence before such date, will be able to choose between applying the new tax benefit or the old tax benefit. The new tax benefit will not apply to new immigrants who purchased a residence before the amended regulations come into effect.

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Barnea Jaffa Lande’s Tax Department has extensive experience assisting new immigrants with tax issues, including purchase tax and other real estate taxes.

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