Capital Gains Tax on Property Transfer — Legal Savings on Home Purchase and Sale

What is Capital Gains Tax and Why is it Important When Transferring Property?

Capital gains tax is a tax imposed by the state on profit generated from an increase in property value over the years. When you sell an apartment for a higher price than the amount you paid for it, the difference (plus adjustment for the Consumer Price Index) is considered "gain" and is subject to tax. During a property transfer — a combination of sale and purchase — capital gains tax can significantly impact your cash flow and determine how much "surplus" you have available for your new apartment.

A property transfer is an important life milestone, and it is often connected to family changes, expansion, or a change of workplace. In any case, when you plan this move, it is important to understand its tax implications. Israeli tax law offers several ways to reduce tax costs, but they require proper planning and deep legal knowledge.

At Mendelbum, Gor, Witzman-Gor & Co., Attorneys at Law — a boutique firm specializing in real estate and property law in Ramat Gan — we assist each of our clients in understanding their rights and tax options, so they can make an informed and cost-saving decision.

What Factors Affect the Amount of Capital Gains Tax?

Capital gains tax is not a simple calculation of price difference. Several factors affect the final amount you will need to pay:

• Original Purchase Price: The amount you paid for the apartment. This is the basis for calculating the gain.
• Current Sale Price: The difference between the sale price and the original purchase price (plus adjustment for the Consumer Price Index) is the basis for calculating capital gains tax.
• Consumer Price Index Adjustment: The law indexes the original purchase price to the Consumer Price Index. If the index increased, the basis for calculating capital gains tax also increases, but this reduces the taxable profit.
• Duration of Ownership: If you owned the apartment for less than one year, a higher tax rate may apply (short-term capital gains tax). If you owned the apartment for more than one year, a lower rate may apply (long-term).
• Type and Classification of Property: A residential apartment, private house, built or unbuilt land — each may have a different tax rate.
• Exemptions and Special Provisions: Under certain conditions, you may be entitled to a partial or full exemption from capital gains tax (see below).

Capital Gains Tax Exemption on Property Transfer — When is it Possible?

One of the most important features of Israeli tax law is that there are several cases in which you can obtain a partial or full exemption from capital gains tax. This is one of the lawful ways to reduce costs when transferring property. Let us examine the most common conditions:

1. Residential Apartment — Owner-Occupied Property

If the apartment you are selling was your residential home — that is, a place where you actually lived — you may be entitled to a significant exemption. The exemption depends on how many years you lived in the apartment and the date of sale. Generally, if you lived in the apartment for at least one year and purchased it to reside in it, there is a basis for a significant exemption. However, the exemption is not automatic — it requires filing the appropriate income tax form and substantiating the conditions.

2. TAMA 38 Housing — Urban Renewal

In urban renewal projects (TAMA 38), there are unique capital gains tax exemptions for residents who were part of the project. If you are selling an apartment that you received as part of TAMA 38, you may be entitled to a significant capital gains tax exemption under certain conditions. This is one of the reasons why it is important to understand the conditions of your project from the outset.

3. Exemption Based on Age or Family Status

Under special circumstances — for example, when selling an apartment by a person of a certain age or when dissolving a household following divorce or death of a family member — there may be a partial or full exemption. Each case is examined individually, and accuracy in documentation and legal procedure is critical.

4. Apartment Purchased with Housing Loan — "Owner-Occupied Property"

If you purchased the apartment with the help of a housing loan (mortgage) and under certain conditions, there are partial exemptions. This requires a careful review of the loan terms and type of property.

Smart Tax Planning — How to Reduce Costs Legally?

Tax planning is a completely legal process in which you arrange your real estate transactions in a way that minimizes tax costs while maintaining full compliance with the law. This is entirely different from tax evasion, which is prohibited. When selling an apartment and purchasing a new one, there are several tax planning strategies worth considering:

Timing of Sale and Purchase

In certain cases, proper timing of the sale and purchase can affect your tax classification. For example, if you sell in one year and purchase in another year, this may affect the tax rate applied to you. This requires advance planning in consultation with a tax advisor or attorney specializing in real estate.

Using Exemptions and Deductions

As mentioned, there are exemptions and special provisions in the law. A thorough understanding of the exemptions you may be entitled to — and **submitting the correct forms on time** — is critical. Many people forgo exemptions they are entitled to simply because they did not know they existed or failed to submit the forms in time.

Combined Transaction or "Package Deal"

When buying and selling simultaneously, it is sometimes possible to make a "package deal" — that is, to combine the two transactions in a legally planned manner that reduces tax costs. This requires deep legal knowledge and careful coordination with tax authorities.

Choosing the Correct Property Valuation in the Land Registry

When registering in the Land Registry (Land Registry Office), the property valuation affects the calculation of capital gains tax. A valuation that is too low may raise suspicions; a valuation that is too high may increase capital gains tax. It is important that the valuation be reasonable and well-documented.

Scenario Comparison — How Capital Gains Tax Affects Your Profit?

To understand the real impact of capital gains tax, let's examine several typical scenarios. Please note that the following figures are examples only and vary according to your specific circumstances, the price index, the applicable tax rate, and other parameters:

*Note: The figures are examples only and depend on price index adjustment, applicable tax rate, your specific exemptions, and additional parameters. Each case is examined individually. For accurate details, contact personal legal counsel.

As can be seen from the table, the difference between a scenario with an exemption and one without can be very substantial. This is why proper planning and deep legal knowledge can save you tens of thousands of shekels.

Additional Costs When Selling an Apartment — Beyond Capital Gains Tax

When you sell an apartment, capital gains tax is not the only expense. There are additional costs you should be aware of:

• Real Estate Agent Commission: If you use the services of a real estate agent, you will typically pay a commission (usually 1%–2% of the sale price). This is a significant cost that should be planned in advance.
• Legal Fees: Drafting a purchase agreement, examining title rights at the land registry, issuing certificates, and legal representation — all require attorney fees.
• Purchase Tax (When Buying): When you purchase the new apartment, you pay purchase tax (usually 5%–8% of the price, depending on the type of property and its size). This is a significant cost that people sometimes forget to plan for.
• Inspection and Insurance Costs: Engineering inspection, mortgage insurance, and additional insurance policies.
• Land Registry Registration Fees: Registration office fees for the transfer of ownership.

All of these must be considered in the overall planning of your apartment move. When seeking legal consultation on this matter, we review all these costs together to give you a complete picture of the financial impact of your decision.

How Mandelboim, Gor, Witzman-Gor and Co. Can Assist You

As a boutique law firm specializing in real estate and property law in Ramat Gan, we have over 18 years of experience representing clients in complex real estate transactions. We understand that moving apartments is not merely a legal transaction — it is an important step in life, and we are here to assist you at every stage.

When you contact us regarding the sale of an apartment and purchase of a new one, we:

• Assess your legal situation: A comprehensive review of your rights in the property, mortgages, third-party rights, and everything else you need to know.
• Calculate the capital gains tax applicable to you: A detailed examination of the tax scope, review of possible exemptions, and proposal of tax planning strategies.
• Plan the transaction: Proper arrangement of sale and purchase dates, legal timing, and advice regarding additional costs.
• Accompany you at every stage: From contract execution, through title examination, to completion of the transfer and tax payment.
• Submit forms to the Tax Authority: Issuance of all required documents and submission to the Tax Authority, to ensure you receive all exemptions you are entitled to.

We believe in personalized and dedicated service to each client. Our first consultation meeting is free of charge, so you can understand your rights and options without obligation.