Capital Gains Tax Guide — When You Pay and When You're Exempt

What is Capital Gains Tax and When Do You Pay It

Capital gains tax is a tax levied on landowners or those holding land rights in Israel when they sell a property at a profit. It is a state tax designed to capture a portion of the gain generated by an increase in the property's value over the years, whether the increase resulted from the owner's investment or from general development in the neighborhood or city.

Capital gains tax is paid on the difference between the original purchase price (or the appraised value at the time of acquisition) and the actual selling price. It is not a tax on the entire price — only on the profit. Almost every seller of a property (house, apartment, developed or undeveloped land) will encounter this calculation when selling.

In recent years, capital gains tax rates have changed several times, and the government has also imposed additional taxes such as state property tax. It is very important to understand your rights as a seller, as errors in calculation or failure to consider exemptions can lead to significant overpayment.

Who Pays Capital Gains Tax

• Landowners and apartment owners — Anyone selling a property at a profit pays capital gains tax, unless they qualify for a special exemption.
• Heirs — If you received land through inheritance and subsequently sold it, capital gains tax is calculated on the difference between the inheritance value and the selling price.
• Contractors and developers — Owners of construction and land development projects pay capital gains tax on profits from the sale.
• Corporations and companies — Companies holding properties pay capital gains tax upon sale.

Original Purchase Price Versus Appraised Value

If you are selling a property you purchased in the past, capital gains tax is calculated on the difference between your purchase price and the selling price. However, if you purchased it many years ago or under special circumstances, or if the property was not purchased but obtained in another way (inheritance, gift, allocation), then an appraised value at the time of acquisition or at another time specified by law is used.

Capital Gains Tax Exemptions — Who Does Not Pay

The law grants several capital gains tax exemptions to specific groups of sellers. These exemptions are very important, as they can save you tens of thousands of shekels. However, to be entitled to an exemption, you must meet certain conditions precisely.

Primary Residence Exemption

One of the most important exemptions is the capital gains tax exemption on a primary residence. If you are selling an apartment that was your primary residence (that is, your permanent place of residence), you may be exempt from capital gains tax — but under certain conditions. Generally, the exemption applies if:

• The apartment was your primary residence at the time of sale or in a period close to it.
• You lived in it for a certain period (usually not less than 2 years).
• You did not sell another apartment with an exemption in a nearby period.

It should be emphasized that this exemption is not automatic — you must prove that the apartment was your primary residence, and sometimes documentation, declarations, and supporting materials are required. If you moved apartments several times, or if the apartment was a secondary residence (for example, an owner of an apartment in Tel Aviv who purchased an additional apartment in Jerusalem), you may not be entitled to the exemption.

Farmers' Exemption

Owners of agricultural land may be exempt from capital gains tax under certain conditions, if the land is used for agricultural purposes and the landowner engages in agriculture as their primary profession.

Exemption for Disabled Persons and Seniors

People with disabilities or seniors (age 65 and over) may be entitled to an exemption or reduction in capital gains tax calculation, but this also requires proof and compliance with certain conditions.

Exemption for Special Cases

There are additional cases in which the law grants an exemption or reduction:

• Family sales — Under certain conditions, the sale of a property between close family members may be exempt or discounted.
• Urban renewal projects — Residents of TAMA 38 or evacuation-rehabilitation projects may be entitled to a substantial reduction in capital gains tax on the new apartment.
• Sale pursuant to court order — A sale made as a result of divorce or another court order may be subject to special conditions.

How to Calculate Capital Gains Tax — Formula and Tips

Calculating capital gains tax is not as simple as multiplying the profit by a fixed rate. There are several factors that affect the final amount:

Tax Rate

The capital gains tax rate varies depending on the period in which you sell the property. In recent years, the government has changed the rates several times. Generally, the rate ranges from 10% to 25% of the profit (or even more under certain conditions), but this depends on current legislation. It is important to check the exact rate at the time of sale, as changes in the law can significantly affect the amount you will need to pay.

Calculation Basis

Capital gains tax is calculated on the difference between the "purchase price" and the "sale price." The purchase price is the amount you paid for the property (or the assessed value if there was no clear purchase). The sale price is the amount you received at the time of sale. This difference is the profit, and it serves as the basis for the calculation.

Basic formula:

• Profit = Sale Price − Purchase Price
• Capital Gains Tax = Profit × Tax Rate

Expenses and Deductions

In calculating capital gains tax, you can deduct certain expenses incurred by you at the time of sale or in connection with the property, such as:

• Real estate brokerage commissions.
• Legal and administrative expenses (attorney, registration, etc.).
• Taxes already paid on the property (purchase tax, for example).
• In some cases, property improvement or repair expenses.

These deductions can significantly reduce the taxable profit, so it is important to maintain accurate documentation of all expenses.

Adjustment for Cost of Living

In some cases, the basis for calculating capital gains tax is adjusted for the cost of living (CPI). This means that the original purchase price is multiplied by a certain index to equate the value in the past with the value in the present. This adjustment can significantly reduce the taxable profit.

Tax on State Costs

In addition to capital gains tax, there is also a "tax on state costs" that has been imposed in recent years. This is an additional tax calculated in a similar manner and at a separate rate. If you sell a property, you should be aware of these two taxes and calculate both.

Scenario Comparison — Examples of Capital Gains Tax Calculation

To better understand how capital gains tax works in practice, let us examine several typical scenarios:

Important Note: The table above presents estimated examples only. Capital gains tax rates vary according to current legislation, and exemption conditions vary according to circumstances. Accurate calculation requires verification of all specific details of your case, including the date of purchase, date of sale, property condition, and whether you are entitled to special exemptions.

Legal Strategies for Reducing Capital Gains Tax

There are several legal strategies that can be implemented to reduce the capital gains tax you will need to pay. It is important to note that each strategy requires careful planning and consultation with an experienced real estate attorney. Let us examine some options:

Leveraging CPI Indexation

If you purchased the property several years ago, you can index the original purchase price to the cost of living (CPI). This raises the purchase basis, thereby reducing the taxable profit. For example, if you purchased an apartment for ₪500,000 ten years ago, the CPI may increase the purchase basis to ₪700,000, which reduces the taxable profit.

Deduction of Expenses

Any expense incurred by you in connection with the property or its sale can be deducted from the profit. This includes real estate commissions, legal fees, registration costs, property inspection costs, and significant improvement expenses. These deductions can significantly reduce the tax amount.

Timing of Sale Planning

In some cases, timing the sale in relation to the tax year can affect the tax calculation. For example, if you plan to sell a property, it may be advantageous to do so on a specific date of the year or in a particular year, depending on current legislation and your personal circumstances.

Proof of Primary Residence

If you are selling an apartment that was your primary residence, it is important to prove this accurately. If you have documents such as an eviction notice, registration certificates at certain dates, witness testimonies, or other documents evidencing that this was your primary residence, this will strengthen your claim for exemption.

Sale by Agreement Within Family

In some cases, selling a property within the family (for example, from parents to children) can be conducted under special conditions that reduce capital gains tax. However, this requires proof that the sale is a genuine transaction and not a sham deal.

Using Discounts in Urban Renewal Projects

If you are a resident in a TAMA 38 project or evacuation and reconstruction, you may be entitled to a significant discount on capital gains tax for the new apartment. It is important to know your rights in the project and utilize them optimally.

How Mandelbaum, Gor, and Witzman-Gor Law Firm Can Help You

Capital gains tax is a complex matter that requires significant legal knowledge and experience in the real estate field. When selling a property, it is crucial to understand your rights, the exemptions you may be entitled to, and the ways to reduce the capital gains tax you will need to pay.

Mandelbaum, Gor, and Witzman-Gor Law Firm has specialized in real estate and property law since 2008. The firm's team consists of attorneys with deep experience in the field, and they are well versed in all aspects of capital gains tax, exemptions, deductions, and legal strategies for cost reduction.

We offer personalized legal consultation to each client, taking into account the unique circumstances of your case. Whether you are selling a residential apartment, a second home, agricultural land, or any other type of property, we can help you:

• Calculate capital gains tax accurately — in accordance with current legislation, utilizing all deductions and discounts you are entitled to.
• Identify exemptions and ways to reduce your tax burden — we check whether you are entitled to an exemption based on primary residence status, agricultural classification, or another category.
• Maintain proper documentation — we help you gather and organize all required documents to prove your rights.
• Submit applications and forms — we handle all bureaucratic aspects of reporting capital gains tax to the tax authorities.
• File an appeal or request for reassessment — if you believe there is an error in the calculation, we can help you file an appeal.

Mandelbaum, Gor, and Witzman-Gor Law Firm is located in Ramat Gan (Donosh 1) and Petah Tikva (Yoni Netanyahu 8), and offers a free initial consultation. During this meeting, we will thoroughly examine your situation, answer your questions, and provide you with an initial assessment of the capital gains tax you may owe and the options available to reduce it.