Guide to Capital Gains Tax Installment Payment Plans

What is a Capital Gains Tax Installment Payment Plan?

A capital gains tax installment payment plan is a legal mechanism that allows a real estate seller to divide the payment of capital gains tax (the tax levied on profits from the sale of land or buildings) over an extended period, instead of paying the full amount when the transaction is executed. This mechanism is supported by Israeli legislation and income tax provisions, and under certain conditions, serves as a significant tool for the parties to the transaction — both seller and buyer — for prudent financial planning.

Capital gains tax itself is a direct tax imposed on the profit created as a result of a change in land use or following new construction. It applies to all sales of built property or land in Israel (subject to certain conditions) and is calculated as a percentage of the profit only, not of the agreed price. Dividing the tax into installment payments, on the other hand, allows cooperation between the parties to ease the financial burden at closing, while preserving the rights of the tax authority and ensuring protection against non-payment.

Who Can Use Capital Gains Tax Installment Payment Plans?

Generally, any real estate seller liable to pay capital gains tax can request to divide the tax into installments, subject to meeting conditions set by the Tax Authority. The conditions typically include: removal of a tax lien note for the benefit of the Tax Authority on the land registry (to secure the Tax Authority's right to collection), written approval from the buyer that he is aware of this debt, and signing an agreement between the seller and the Tax Authority regarding repayment terms. Not every case is eligible for installment payment, and there are situations where the Tax Authority may refuse a request — for example, if the seller is a company that has not found a reliable source of payment, or if there are prior tax debts that have not been settled.

What is the Difference Between Regular and Early Installment Plans?

There are two main ways to arrange capital gains tax installment payments: regular installment plans and early installment plans. In a regular installment plan, the seller pays the tax in installments after the transaction closes, typically before the buyer's property is registered in the land registry. In an early installment plan, the seller can request an installment arrangement even before the transaction is executed, so that when the transaction is completed, the installment plan is already approved and the terms are clear. Early installment plans are particularly useful when dealing with a large or complex transaction, as they allow both parties to plan ahead and create clear legal safeguards.

Conditions for Approval of Capital Gains Tax Installment Plans

The Tax Authority does not automatically approve installment plans. Typically, it requires strict compliance with conditions designed to ensure that the tax is actually paid within the agreed period. Among the main conditions:

• Tax Lien on Land Registry: The Tax Authority requires that a tax lien note be registered on the land registry for its benefit in the amount of the assessed tax. This is a legal way to ensure that if the seller does not pay, the Tax Authority can foreclose on the property directly.
• Written Agreement: Between the seller (or the buyer if liable for payment) and the Tax Authority, specifying the tax amount, number of payments, payment dates, interest (if any), and provisions regarding late payment.
• Buyer's Approval: Typically required that the buyer confirm in writing that he is aware of this debt and that he agrees that the property will remain with the tax lien until it is settled.
• Payment Capability Review: The Tax Authority may examine the financial status of the seller (or buyer, if the latter is liable for payment) to assess whether the person has genuine ability to meet the obligation.
• Income Tax Up to a Certain Date: At times, the Tax Authority requires that the seller complete all his income tax obligations by a certain date, to prove legal stability.

Each case is examined individually, and the decision depends on the specific circumstances of the transaction and the parties. Our office, Mendelboim, Gor, Witzman-Gor and Co., with over 18 years of experience in real estate and property law, can assist in assessing your prospects and creating an agreement that will meet the Tax Authority's requirements.

Risks and Challenges in Capital Gains Tax Installment Plans

Although capital gains tax installment plans offer significant advantages, there are also risks and disadvantages that should be considered before making a decision:

Risks for the Seller

• Tax Lien Registration: The tax lien may affect the seller's ability to obtain an additional loan on the property or conduct any transaction involving it until the tax is paid. This could limit their financial flexibility.
• Interest and Penalties: If the seller delays payment, the tax authority may impose significant interest and penalties, which can increase the debt beyond the original calculation.
• Forced Foreclosure: If the seller fails to pay as planned, the tax authority can foreclose on the property according to the lien, resulting in a complete loss of the property.
• Impact on Credit: Debt to the tax authority may affect the seller's credit rating and their ability to obtain loans in the future.

Risks for the Buyer

• Uncertainty in Ownership: As long as the tax lien exists in the land registry, the buyer owns a property that has a lien for public purposes. This may affect the property's value or the buyer's ability to sell it in the future.
• Foreclosure Risk: If the seller fails to pay, the tax authority can foreclose on the property, which may harm the buyer despite having already paid for the property.
• Legal Cooperation Obligation: In some cases, the tax authority may impose a legal obligation on the buyer to assist in collecting the tax from the seller, or to withhold part of their payment as security.

Due to the complexity of these risks, it is essential to obtain expert legal advice before signing an installment agreement. Our firm provides personalized and focused consultation on this matter, and our first consultation meeting is free of charge.

Comparison: Different Scenarios in Capital Gains Tax Installment Plans

To better understand the differences between various scenarios, below is a comparative table of different situations in which capital gains tax installment plans may be relevant:

As can be seen, each case is unique and requires careful examination of the circumstances. If you are considering a capital gains tax installment plan, it is essential to understand your specific situation and the legal and financial implications of your choice. Our firm provides personal and in-depth counsel on this matter.

Capital Gains Tax Installment Payment Application Process

The application process for capital gains tax installment payment involves several stages, each with its own requirements and timelines. Below is a general description of the process:

Stage 1: Preparing the Application

The property owner (or their attorney) must prepare a formal application to the Tax Authority, detailing: property details, seller's name, buyer's name, transaction price, preliminary calculation of capital gains tax, and the requested installment conditions (number of payments, dates, etc.). The application must be accompanied by supporting documentation: sales contract, tax certificates, financial statements, etc.

Stage 2: Submitting the Application

The application is submitted to the Tax Authority (sometimes to the local capital gains tax office or a specific department). It is essential to retain a copy of the application and receive submission confirmation (for example, registered mail or direct submission with a signature).

Stage 3: Review and Waiting Period

The Tax Authority reviews the application. This typically takes anywhere from a few weeks to several months, depending on the Tax Authority's workload and the complexity of the case. During this stage, the Tax Authority may request additional information or clarifications.

Stage 4: Decision and Approval Receipt

The Tax Authority announces its decision: approval of installment payment, rejection of the application, or a request for additional information. If the application is approved, the Tax Authority sends an official letter with the installment conditions, tax amount, number of payments, and dates.

Stage 5: Signing the Agreement

The seller (or buyer, if they are the party liable for payment) signs an installment agreement with the Tax Authority. The agreement details all conditions, interest, penalties for non-payment, and the Tax Authority's rights.

Stage 6: Registration of Debt Notation on the Land Registry

An attorney (usually representing the seller or buyer) files a request to register a debt notation on the land registry in favor of the Tax Authority, in accordance with the installment agreement. This secures the Tax Authority's rights over the property.

Stage 7: Payments

The seller pays the capital gains tax in installments according to the schedule established in the agreement. For each payment, the Tax Authority may send a payment confirmation. Once the tax amount is paid in full, the Tax Authority agrees to remove the debt notation from the land registry.

This is a detailed and lengthy process that requires attention and legal expertise. Our firm, Mandelbaum, Gor, Witzman-Gor & Co., with extensive experience in this field, can accompany you through every stage of the process, ensure that your application meets the Tax Authority's requirements, and protect your rights.

How Our Firm Can Help You

Mandelbaum, Gor, Witzman-Gor & Co., Attorneys at Law, provides expert legal counsel on tax appreciation installment plans and all matters relating to real estate and property law. With over 18 years of experience in the field, we understand the complexities of property taxation, tax authority requirements, and the legal risks of any transaction.

We can help you:

• Assess your case: We will examine your financial situation, the property, and the appropriate installment plan options.
• Prepare a strong request: We will prepare a formal request to the tax authority with all necessary documentation to increase the chances of approval.
• Conduct negotiations: We will communicate with the tax authority on your behalf, raise important questions, and work toward the best terms for you.
• Protect your rights: We will ensure that the agreement with the tax authority protects your rights and does not impose unfair obligations on you.
• Plan sophisticated tax strategy: We will help you understand the financial implications of the installment plan and plan your payments accordingly.

Our first consultation is free of charge, so you can speak with us without obligation and receive an initial assessment of your case. We are located in Ramat Gan and Petah Tikva and are available for in-person meetings or telephone consultation.