January 2025: Legislative amendments to real estate taxation in Israel
The new year is already heralding significant tax innovations in Israel in general, and in real estate taxation in particular. Following are highlights of the legislative amendments that were approved by January 2025.
Purchase tax brackets when purchasing an additional residential apartment
The amendment: the Temporary Order defining high purchase tax brackets for the purchase of an additional residential apartment (8%, 10%), has been extended until December 31, 2026.
The implications: buyers of apartments for investment will pay 8% purchase tax from the first shekel up to the sum of ILS 6,055,070, and 10% purchase tax on any remaining purchase price exceeding this sum.
Freeze on various tax brackets
The amendment: the Real Estate Taxation Law contains provisions defining various tax brackets. At the beginning of each year, the tax brackets are updated according to the rise in the relevant index. The new legislation freezes particular tax brackets, such that their sums will not be updated according to the rise in the index until the beginning of 2028.
The frozen tax brackets are: the purchase tax brackets on a single apartment; the purchase tax brackets on an additional apartment (at this stage, the freeze is until December 31, 2026); the maximum capital gains tax exemption for a single apartment; the capital gains tax exemption brackets in respect of the sale of two inexpensive apartments for the purpose of purchasing one expensive apartment; and the maximum tax exemption when a purchase price is affected by additional building rights. Various tax brackets under the Income Tax Ordinance have also been frozen, including the maximum tax exemption on rental income. The purchase tax brackets prescribed in the Purchase Tax Regulations that refer to the tax brackets defined in the Real Estate Taxation Law (such as the purchase tax brackets for new immigrants) have also been frozen.
The implications: the tax brackets remain the same, notwithstanding the rise in the index. Therefore, a larger portion of the transaction value will either be taxable or taxable at a higher rate, depending upon the circumstances.
Surtax / additional tax on high income
The amendment: an additional tax of 2% has been imposed on income from capital sources exceeding ILS 721,560, in addition to the previously imposed 3% surtax.
What proposals were included in the draft bill that ultimately were not approved?
- The draft bill proposed to impose a surtax on a capital gain from the sale of a residential apartment that is not tax exempt, even if its value is lower than ILS 5,382,285. This proposal was not approved, such that the capital gain from the sale of any residential apartment – even on a residential apartment without a capital gains tax exemption – will not be included in the calculation of taxable income, so long as the apartment’s sale value does not exceed ILS 5,382,285.
- The draft bill also proposed to impose a surtax already at the stage of reporting a sale of a real estate property to the Real Estate Tax Administration. This proposal was not approved.
The implications: anyone with annual taxable income exceeding ILS 721,560 (the maximum) will be subject to a 3% surtax on income exceeding the maximum. If a portion of the annual taxable income is from capital sources, and that portion alone exceeds the maximum, then that portion that exceeds the maximum will be subject to an additional tax at the rate of 2%.
For example: Let’s assume that an individual has annual taxable income totaling ILS 2,000,000: ILS 1,000,000 from capital sources and ILS 1,000,000 from labor income.
All taxable income exceeding the maximum will be subject to a 3% surtax (ILS 1,278,440). In addition, capital income exceeding the maximum (i.e., ILS 278,440), will be subject to additional tax at the rate of 2%.
Transfers of real estate held by closely-held companies to shareholders with and without liquidating the company
Within the framework of revolutionary legislation seeking to tax profits that were not distributed as dividends in particular companies, a Temporary Order was issued for 2025 that enables the transfer of real estate held by a company to its shareholders in two tracks. These tracks will apply solely to closely-held companies (a company controlled by a maximum of 5 people and subject to additional conditions).
The first track – a transfer of real estate to the shareholders during liquidation of the company is exempt from capital gains tax and from purchase tax, with 0% VAT imposed during the liquidation stage.
If a shareholder sells the property in the future, he/she will be able to choose between two alternatives for determining the date and value of the property’s purchase for the purpose of calculating the capital gain from the property sale transaction – either the date and value of the company’s purchase of the real estate, or the date and value of the shareholder’s purchase of his/her shares.
The tax rate on the sale will be linear – the real capital gain up until the transfer date of the property to the shareholder will be taxed at the rate of 47%, while the real capital gain since the transfer date and up until the date of sale will be taxed at the rate of 25% (plus surtax, if applicable). During such a sale, shareholders will not be allowed to use a personal tax exemption (such as an exemption in respect of a single apartment or a testator’s exemption).
The tax to be imposed will be dividend tax at the height of the distributable profits in the company only. Preconditions to this are that the property’s classification has not been changed to business inventory during its transfer to the shareholder and provided that the liquidation began in 2025 and that the tax is paid by the end of that year.
The second track – a transfer of real estate to a material shareholder without liquidating the company. In this track too, a transfer of property will be exempt from capital gains tax and from purchase tax, provided that the transfer is completed by the end of November 2025, and 0% VAT will apply to the stage of the property transfer to the shareholder. In this track as well, when the shareholder sells the property, he/she can choose between two alternatives for determining the date and value of the purchase, as with the first track, and the tax rate will also be similar to the tax rate in the first track, including the restriction on the use of a personal exemption.
The tax that will be imposed is dividend tax at the height of the remaining purchase value of the property being transferred (purchase value including deductible expenses and net of depreciation) on the transfer date, after deducting loans from a financial institution in respect of which a lien was registered.
These tracks are worthwhile, especially in instances whereby an individual purchased shares in a real estate association for a large sum ,however, due to circumstances relating to the date of the company’s purchase of the real estate (prior to 1998) and the date of the individual’s purchase of shares (after 2005), the shareholder was unable to take advantage of this cost when selling the property he/she received from the company during its liquidation – and this, since the date and value of the purchase when selling the property are the date and value of the company’s purchase of the property.
According to these alternatives, such individual purchaser will be able to choose the date and value of his/her purchase of shares for the purpose of calculating the capital gain from the shareholder’s sale of the property subsequent to its transfer to him/her, which enables this shareholder to overcome the aforesaid tax problem.
In conclusion, individuals holding real estate through closely-held companies are advised to examine whether the possibility of using one of the aforesaid tracks may be beneficial to them from a tax perspective. Of course, each case should be examined on its own merits, and we recommend that shareholders not procrastinate, since they must implement their choice during the coming year.