Guide to Capital Gains Tax on an Apartment Owned by a Company

Capital Gains Tax on an Apartment Owned by a Company – Introduction

Selling an apartment or real estate property owned by a company involves complex and critical taxation issues. Capital gains tax is a tax on the profit generated from the sale of land or a building in Israel, and its calculation method and amount vary according to the type of owner (individual, company, investment fund, etc.), the holding period, and the expenses that can be deducted from the profit. When the property belongs to a company, taxation becomes more complicated, as one must also consider corporate tax, distribution tax (dividends), and overall tax planning of the company.

Mandelboim, Gor, Witzman-Gor & Co., with over 18 years of experience in real estate law, and deep knowledge of real estate taxation and corporate matters, is well-positioned to assist. On this page, we will learn how capital gains tax on an apartment in a company is calculated, what the applicable rates are, what tax planning is possible, and what common mistakes should be avoided.

What is Capital Gains Tax?

Capital gains tax is a tax on the profit generated from the sale of land or a building in Israel. The profit is calculated as the difference between the sale price and the "cost basis" which begins with the original purchase cost and can be updated with capital expenditures made to improve the property. Capital gains tax is paid to the tax authority upon the sale of the property or upon its transfer, and it is usually part of the expenses the seller must plan for in advance.

Who Pays Capital Gains Tax When a Property is Owned by a Company?

When selling an apartment or property owned by a company, capital gains tax is paid by the company itself, not by its shareholders. This is because the company is considered the legal owner of the property, and the shareholders are only indirect owners. Later, when the company distributes profits to shareholders (in the form of dividends or capital reduction), additional tax may apply to the distribution, depending on the dividend tax rate in Israel.

Calculating Capital Gains Tax on an Apartment in a Company – Practical Steps

Calculating capital gains tax involves several important steps. First, you must determine the cost basis of the property — this is the original purchase cost, plus any capital expenditures made to improve the property (such as significant renovations, legal expansion, etc.). Second, you must determine the actual sale price. Third, the profit is calculated as the difference between the price and the cost basis. Fourth, the applicable capital gains tax rate is applied to the profit, taking into account the type of owner (profit-making company or corporation), the holding period, and the type of property (residential apartment, office, store, etc.).

Cost Basis – How is it Calculated?

Cost basis is the starting point for calculating profit. Generally, this is the original purchase price of the property, as it appears in the purchase agreement and in the land registry. However, if the company inherited the property or received it as a donation, the cost basis will begin with the value of the property on the date of inheritance or donation. Additionally, capital expenditures made to improve the property can be added to the cost basis — but not all expenses are accepted. Operating expenses (such as annual maintenance costs, insurance, property tax) cannot be added to the cost basis; only expenses that improve the property on a permanent basis (such as construction, substantial renovations, legal expansion) can be added, subject to certain conditions.

Capital Gains Tax Rates for Companies

The capital gains tax rate for a company selling real estate depends on several factors:

1. Type of Company: A profit-making company pays capital gains tax at a different rate than a non-profit organization or investment fund. A regular company (profit-making) pays at the highest rate.

2. Holding Period: The longer a company held the property, the more likely it may be entitled to a certain tax discount (under certain circumstances). However, this is not always the case — it depends on the laws applicable in the relevant period.

3. Type of Property: A residential apartment may have a different rate than a commercial property (office, store, warehouse).

4. Property Use: If the property was used for business purposes (company offices, store, etc.), the rate may be different than if the property was used for investment only (rental apartment).

Generally, the capital gains tax rate for a profit-making company selling real estate ranges from approximately 25%–35% of the profit, but this varies depending on the applicable legislation in the relevant period and the specific circumstances of the case. It is important to consult with a tax advisor or real estate attorney to obtain an accurate calculation.

Comparison: Selling an Apartment Through a Company vs. Selling an Apartment as an Individual

When comparing the sale of an apartment through a company to the sale of an apartment by an individual, it is important to understand the differences in taxation costs and required planning:

When Is It Beneficial for a Company to Hold Real Estate Assets?

Holding real estate assets through a company can be beneficial in certain cases:
• When the company uses the asset for its own business activities (offices, retail space, etc.).
• When there is long-term tax planning and the company does not plan to sell in the near future.
• When shareholders prefer to retain profits in the company at this stage, rather than distribute them immediately as dividends.
• When there is protection from personal liability (a company limits the investment risk to the asset itself).
However, holding assets in a company also involves higher management, reporting, and insurance costs, which should be considered in the decision-making process.

Common Mistakes in Calculating Appreciation Tax on an Apartment Owned by a Company

Mistake 1: Failure to Add Capital Expenditures to the Cost Basis

A company purchased an apartment and performed substantial renovations, but did not record the expenses as capital expenditures or did not add them to the cost basis when calculating appreciation tax. As a result, the profit was calculated based on a higher base than actual, and the appreciation tax was higher than required. It is very important to keep receipts, invoices, and documentation of all capital expenditures, and to spend time reviewing them with a tax advisor or real estate attorney to ensure they are accepted.

Mistake 2: Failure to Distinguish Between Current Expenses and Capital Expenditures

A company pays for annual maintenance, insurance, property tax, and small repairs. These expenses are paid from the company's current revenues (such as rental income), and cannot be deducted from the cost basis of appreciation tax. Only capital expenditures (major renovations, legal expansion, construction) can be added. Companies often confuse the two, leading to incorrect calculations.

Mistake 3: Forgetting Dividend Tax on Distribution to Shareholders

When a company sells an asset with substantial profit, it pays appreciation tax on the profit. Subsequently, if the company distributes the profit (net of tax) as a dividend to shareholders, an additional tax applies to the dividend. Shareholders are not always aware of this fact and plan only for the gross profit. Proper tax planning should account for these two layers of taxation.

Mistake 4: Failure to Update Cost Basis According to Index

In some cases, the cost basis of an asset purchased in the past may be updated according to a specific economic index (depending on the laws applicable in the relevant period). If a company does not update the cost basis accordingly, the profit may be calculated as too high. This is a technical error that is difficult to identify without professional consultation.

Mistake 5: Failure to Distinguish Between a Residential Property and a Commercial Property

Appreciation tax rates may differ for a residential apartment compared to an office or store. A company that sells a commercial property may calculate the tax at an incorrect rate if it was not aware of the difference. It is important to determine the type of property precisely and use the appropriate rate.

Mistake 6: Failure to Report to the Tax Authority

A company that sells real estate must report the transfer to the tax authority and pay the appreciation tax on time. Failure to report or late reporting may result in penalties, interest, and additional liability. It is very important to meet the tax authority's deadlines.

Tax Planning – Options and Considerations

Can Appreciation Tax Be Avoided?

No, appreciation tax is a legal obligation when selling real estate in Israel. However, you can plan the taxation to reduce the burden, or at least understand the consequences in advance. Several planning options include:

Retaining Profits in the Company

Instead of immediately distributing the profit as a dividend, the company can retain it in its coffers. This defers dividend tax, but the company still pays appreciation tax on the profit itself. This option may be beneficial if the company will use the profit for additional investment or business activity.

Planned Distribution

If the company will distribute profits, you can plan the timing and amount of the distribution to reduce overall taxation costs, based on the specific circumstances of the shareholders (for example, if there is a year in which a shareholder has lower income).

Planned Capital Expenditures

If the company plans to improve or upgrade the property before sale, you should plan the investment in time and ensure that it is classified as a capital expenditure to reduce the profit subject to appreciation tax.

Planned Sale Price

When selling, it is important to ensure that the sale price reflects the actual market value, and that all sales costs (brokerage fees, legal costs, registration costs) are properly budgeted. These costs may affect the net profit.

Early Tax Advice

Most importantly, you should consult with a tax advisor or real estate attorney before the sale, not after. Early tax planning can save a lot of money and avoid costly mistakes.

Why It Is Important to Consult with a Real Estate Law Firm

Selling an apartment owned by a company is a complex legal and tax transaction, and a small mistake can lead to significant expenses. Mandelboim, Gor, Witzman-Gor and Co. has over 18 years of experience in real estate and property law, with deep knowledge in real estate taxation and company matters. We assist companies and individuals at every stage of property sale and purchase, including tax planning, documentation review, and ensuring compliance with laws.

When you consult with a real estate law firm, you receive:

• Accurate Legal Advice: A clear understanding of your rights and obligations in the transaction.
• Tax Planning: Options to reduce your tax burden, tailored to your circumstances.
• Full Support: From the beginning of the process to completion, including coordination with the tax authority, the Land Registry, and other relevant bodies.
• Avoiding Mistakes: Identifying and addressing potential issues before they become real problems.
• Saving Time and Money: An efficient and organized process, without delays or unexpected expenses.

Our firm serves companies and individuals in Petah Tikva, Ramat Gan, and throughout the central region. We offer a free initial consultation so you can understand your situation and receive preliminary recommendations, without any obligation. We believe in personal and dedicated work, and our approach to each client reflects this.