Israel Tax Authority Issues Executive Order allowing Double Purchase Tax Benefits for Certain Residential Buyers

The Israel Tax Authority (ITA) published a new directive a few days ago that updates the rules for persons classified as disabled, blind, or injured during Israel’s various wars, and families of fallen soldiers. The directive also addresses the question of whether a disabled person who received a residential apartment as a gift from a relative is allowed two purchase tax benefits concurrently.

The purchase tax benefit pursuant to Regulation 11

A person who is classified as disabled, blind or injured during Israel’s various wars or a family member of a fallen soldier, who purchases a residential apartment for his/her own residence is entitled to reduced purchase tax for that apartment at a rate of 0.5% of the total value of the purchase. If this will be buyer’s sole apartment and the value of the apartment does not exceed ILS 2,500,000, then the tax benefit is even higher, and the buyer will pay no purchase tax up to the sum of ILS 1,978,745 (correct to 2024) and only 0.5% on the balance of the apartment’s value.

Those eligible for this benefit will only be able to exercise it twice in their lifetime.

Executive Order 3/2024 updates the instances when Regulation 11 applies

Even before the directive was issued, the ITA operated according to particular rules with regard to the tax benefit pursuant to Regulation 11, but they were not centralized or published in an orderly manner. As a result, anyone not specializing in the field was not always aware of those rules.

The ITA issued Executive Order 3/2024 a few days ago, which contains guidelines for implementing Regulation 11. Some of the Executive Order’s provisions are not new, but are intended to clearly stipulate the ITA’s official position, while other provisions are the ITA’s first official publication of its position in relation to particular issues.

The Executive Order clarifies, inter alia, the guidelines for granting a purchase tax benefit under Regulation 11 for parents who purchase an apartment for a disabled minor child or for a disabled child who is a legally incompetent adult, and clearly specifies the actions that must be taken in order to receive this benefit. The Executive Order also refers to the various categories included in the definition of “disabled” in the Purchase Tax Regulations, and prescribes various provisions intended to make it easier for taxpayers in instances in which they were doubtful of whether the definition applies to them.

Instances when two different purchase tax benefits can be applied to the same transaction

When any person receives a residential apartment as a gift from a relative (the definition of “relative,” for the purposes of purchase tax, is a spouse, parent, sibling, offspring and an offspring’s spouse), he/she is entitled to a purchase tax benefit at the rate of 1/3 of the applicable regular purchase tax.

Pursuant to the Executive Order, when the recipient of such gift is also “disabled” (as this term is defined in the Purchase Tax Regulations), he/she will be granted the special tax benefit that Regulation 11 grants to the disabled as specified above, as well as the purchase tax benefit upon receiving a residential apartment as a gift from a relative.

Therefore, such person is entitled to both benefits: 1/3 of the purchase tax payable for receiving a residential apartment as a gift from a relative and the reduced purchase tax rate for the disabled.

Instances when double purchase tax benefits are not allowed

Case law has deliberated several instances when the court rejected taxpayers’ applications to apply two purchase tax benefits to a transaction.

In the Geva case of 2005, a couple jointly purchased a residential apartment. The woman was a new immigrant and sought to take advantage of the special purchase tax benefit for new immigrants (correct to the date of the transaction deliberated by the court, the tax brackets were: 0.5% up to ILS 1,169,845 and 4.5% on the balance of the apartment’s value).

The husband was also entitled to a purchase tax benefit pursuant to the Housing Loan Law by virtue of his security service and, correct to the date of the transaction, was entitled to a purchase tax benefit according to a section that is no longer in effect (0% up to ILS 499,385, second bracket of 3.5% on up to ILS 775,075 and the third bracket of 4.5% on the balance of the apartment’s value).

The couple sought to apply both benefits to obtain an optimal tax calculation for themselves (the first tax bracket of 0% up to ILS 499,385 (out of the husband’s tax benefit), the second tax bracket of 0.5% on up to ILS 1,169,845 (out of the wife’s tax benefit), and 4.5% on the balance of the apartment’s value). Their application was denied. The court ruled that, without an express statutory provision, an expanded aggregate purchase tax benefit is not allowed.

In this case, combining the benefits would result in a benefit that exceeds the clear boundaries delineated for each of the two provisions separately by the legislature, by taking the best of each separate benefit and combining the preferred parts into a benefit that the legislature had not specifically prescribed, and therefore, their application could not be approved.

The Supreme Court deliberated on another case of an application for double purchase tax benefits – the Gur case of 2014. We point out that this ruling was handed down when the previous version of Regulation 11 was in effect (purchase tax benefit for the disabled). According to the previous version, the tax benefit for a disabled person purchasing a sole residential apartment of 0% up to ILS 2,500,000 did not exist, and the purchase tax benefit for the disabled was 0.5% of entire value of the apartment.

In the Gur case, a disabled person who purchased a residential apartment as his sole apartment sought to combine the purchase tax benefit for the disabled of 0.5% with the purchase tax benefit to buyers of a sole apartment, so that the tax benefit would be bracketed (similarly to the current version): 0% on the sum of the first tax bracket for a sole apartment and 0.5% on the balance of the apartment’s value.

The Supreme Court ruled that while the language of the two provisions does not rule out the possibility of combining them, it also does not indicate a clear intention of allowing their combination. The court rejected the taxpayer’s application to combine the purchase tax benefits and ruled that it could not interpret the Purchase Tax Regulations broadly in a manner not clearly anchored in their wording or purpose.

Summary and conclusions

Combining two purchase tax benefits, each of which includes different tax brackets, in a way that creates new tax brackets that are a hybrid of optimal tax brackets from each of the two provisions, is not possible, unless the law explicitly allows it, as was done in the current version of Regulation 11, which combines the purchase tax bracket granted to eligible taxpayers as specified above when purchasing a sole apartment with the tax benefit granted to the disabled, under particular conditions.

On the other hand, and in the instance of combining the purchase tax benefit for a disabled person with the purchase tax benefit of 1/3 of the regular purchase tax when an apartment is received as a gift from a relative, it appears that it would have been easier for the ITA to allow this combination even without an explicit provision of law. It is possible that the ITA considers the purchase tax to which a disabled person is entitled under Regulation 11 as the disabled person’s regular purchase tax, and therefore, when a disabled person receives an apartment as a gift from a relative, it allows him to pay only 1/3 off this regular purchase tax.

Furthermore, in this instance, there is no mixing of tax brackets in order to devise new tax brackets, as was attempted in the Geva and Gur cases, but rather a “softer” combination of two tax benefits.

In any event, considering the ITA’s official position in this regard, and unless otherwise ruled by the court, it is permitted to combine the purchase tax benefit granted to the disabled with the purchase tax benefit granted when a residential apartment is received as a gift from a relative.