Capital Gains Tax on a Second Apartment in Ramat Gan

What is Appreciation Tax on a Second Apartment?

Appreciation tax is a tax imposed by the state on profit generated from the sale of a property (apartment, house, or land) in Israel. When selling a second apartment in Ramat Gan, the profit from the sale—namely the difference between the original purchase price and the sale price—is subject to appreciation tax. This is a national tax administered by the Israeli Tax Authority, and cannot be avoided without a thorough examination of each case and its unique circumstances.

The Mendelbaum, Gor, Witzman-Gor & Co. law firm, with over 18 years of experience in the real estate and property sector, assists clients in Ramat Gan in understanding their legal obligations and planning the sale in an optimal tax-planning manner.

Why is Appreciation Tax Important When Selling a Second Apartment?

A second apartment is generally considered an investment property, not primary residence. Therefore, different expenses and conditions may apply. When selling a second apartment in Ramat Gan, substantial profit may be generated, especially if the apartment was purchased many years ago and the property's value has increased significantly. The appreciation tax on this profit can amount to a significant percentage of the total profit, making advance planning essential.

Who is Liable for Appreciation Tax?

Every second apartment owner in Ramat Gan whose property is sold while they are an Israeli resident is legally required to file a declaration form with the Tax Authority and calculate the appreciation tax. If the apartment is jointly owned by multiple persons, each owner will be liable according to their share in the property. It is important to understand that the reporting obligation applies even if there was no profit or if there was a loss—the Tax Authority must be kept informed.

Capital Gains Tax Calculation – Steps and Parameters

Calculating capital gains tax is not a straightforward process. It depends on several legal and tax-technical parameters, and a calculation error can result in a claim from the Israel Tax Authority, interest, and penalties. Below is the basic procedure:

Step 1: Determining the Tax Base (Purchase Price)

The purchase price of the apartment is the starting point. This is not necessarily the price stated in the purchase agreement – but rather the value agreed with the Tax Authority at the time of purchase. If the apartment was purchased many years ago, its value for capital gains tax purposes may differ from the actual price. In certain areas in Ramat Gan, particularly in TAMA 38 or urban renewal projects, there may be discounts or benefits at the time of purchase that affect the tax base.

Step 2: Determining the Sale Price

The sale price is the price at which the apartment was actually sold. This must be documented in the sales contract and in the land registry. If there is a significant discrepancy between the declared price and the actual price, the Tax Authority may conduct an audit.

Step 3: Calculating Nominal Profit

Nominal profit is the difference between the sale price and the purchase price. This is not the final profit on which tax will be charged – there are additional steps involving adjustments and allowable expenses.

Step 4: Deducting Allowable Expenses

From the nominal profit, certain expenses incurred during the purchase, ownership, or sale of the apartment may be deducted. These expenses may include:

• Purchase costs: attorney fees, land registry search costs, structural inspections, insurance inspections.
• Improvement and renovation costs: only improvements that added permanent value to the apartment, not regular maintenance.
• Sale costs: real estate agent commissions, advertising expenses, repeat inspections.
• Taxes and fees paid: purchase tax (if paid at the time of purchase), land registry registration fees.

It is important to keep all receipts and invoices to prove these expenses to the Tax Authority.

Step 5: Adjustment for Price Index

If the apartment was held for a long period (typically over 3 years), the tax base may be adjusted to the official price index of the Central Bureau of Statistics. This is intended to eliminate the effect of inflation from the tax calculation, so that tax is charged only on the real profit (in constant values) and not on the change in the index.

Step 6: Calculating the Tax Rate

The capital gains tax rate varies depending on the holding period of the property:

• Up to 2 years: 25% of the profit.
• From 2 to 3 years: 20% of the profit.
• From 3 to 4 years: 15% of the profit.
• From 4 to 5 years: 10% of the profit.
• Over 5 years: 5% of the profit (under certain conditions there may be full exemption).

Therefore, a second apartment sold after more than 5 years will have significantly less tax imposed on it than an apartment sold within 2 years.

Exemptions and Rights in Capital Gains Tax on a Second Apartment

Although a second apartment is not a primary residence, there are certain situations in which it is possible to reduce or eliminate capital gains tax, or to obtain legal benefits. It is important to examine each case individually, as conditions vary:

Exemption for Disabled Persons and Those with Disabilities

A person with a disability or physical limitation, where the apartment was purchased for their own residence or that of a close family member, may be entitled to a partial or full exemption. This depends on the decision of the Israel Tax Authority and the degree of disability.

Exemption for Those Holding Only a First Apartment

If the second apartment was sold to finance the purchase of a primary residence, and all conditions are met (including limitations on apartment size and price), a partial exemption may be available.

Exemption for Investment in Urban Renewal (Tama 38)

In urban renewal projects in Ramat Gan (Tama 38), tax benefits can be obtained upon sale of an apartment purchased as part of such a project, under certain conditions. This depends on the fulfillment of all legal requirements.

Tax Rate Reduction for Low-Income Owners

A person whose income is below a certain threshold may be entitled to a reduction in the tax rate, under certain conditions.

Exemption for a Person Selling a Second Apartment Following the Sale of a Primary Residence

In certain situations, if a person sold a primary residence and purchased a new residence, and subsequently sells a second apartment, they may be entitled to an exemption or reduction due to a home exchange arrangement.

All of these are examples only. Each case is examined individually by the Israel Tax Authority, and legal expertise is required to identify the relevant rights. Mendelbaum, Gor, Witzman-Gor and Partners thoroughly examines each client's unique circumstances and will assist in filing for an exemption or benefit if applicable.

Example Scenarios – Calculating Capital Gains Tax on a Second Apartment in Ramat Gan

To understand the matter practically, below are several hypothetical scenarios (these do not constitute legal advice for any specific individual):

Scenario 1: Second Apartment Sold After 3 Years

Data: An apartment was purchased for ₪1,000,000 and sold for ₪1,300,000 after 3 years. Purchase expenses: ₪30,000. Sale expenses: ₪20,000.

Calculation:

• Nominal gain: 1,300,000 - 1,000,000 = ₪300,000
• Expense deduction: 300,000 - 30,000 - 20,000 = ₪250,000
• Tax rate (3 years): 15%
• Capital gains tax: 250,000 × 15% = ₪37,500

In this case, the seller would need to pay ₪37,500 in capital gains tax to the Tax Authority. If it had been held for over 5 years, the rate would have been only 5% (₪12,500).

Scenario 2: Second Apartment with TAMA 38 Tax Benefit

Data: An apartment purchased within a TAMA 38 project in Ramat Gan at a discounted cost of ₪800,000, sold for ₪1,200,000 after 4 years. Expenses: ₪25,000.

Calculation without benefit:

• Gain: 1,200,000 - 800,000 - 25,000 = ₪375,000
• Rate (4 years): 10%
• Tax: 375,000 × 10% = ₪37,500

With TAMA 38 benefit (subject to conditions): Partial or full exemption may be available, which would significantly reduce the tax. This requires a thorough review of all conditions.

Scenario 3: Second Apartment Sold at a Loss

Data: An apartment was purchased for ₪1,500,000 and sold for ₪1,300,000 after 6 years. Expenses: ₪40,000.

Calculation:

• Gain: 1,300,000 - 1,500,000 - 40,000 = -₪240,000 (loss)
• Capital gains tax: ₪0 (no tax on losses)

However, you must file a report with the Tax Authority to document the loss, as in the future you may be able to use it to offset other losses.

How Mandelboim, Gor, Witzman-Gor & Co. Assists with Capital Gains Tax

Mandelboim, Gor, Witzman-Gor & Co. has over 18 years of experience in real estate and property law in Ramat Gan and the central region. We specialize in representing plaintiffs in tort law, and also assist clients with civil-commercial matters, including real estate and property law.

When you plan to sell a second property in Ramat Gan, we offer:

• Personal and In-Depth Consultation: Review of all details of your case – purchase costs, expenses, family status, income – to calculate the tax accurately and identify rights to exemption or reduction.
• Tax-Legal Planning: Assistance in planning the sale in a manner that minimizes capital gains tax in a completely lawful way.
• Statement Preparation: Professional preparation of the form for the Tax Authority, with all required documentation.
• Tax Authority Representation: Management of communication, handling inquiries, submission of exemption requests, and representation in the appeals committee if necessary.
• Support Throughout the Sale Transaction: From signing the purchase agreement through registration with the Land Registry, ensuring compliance with all legal and tax requirements.

First consultation meeting at no cost. We can understand your situation, answer initial questions, and propose a customized support plan.

Mandelboim, Gor, Witzman-Gor & Co. is located in Ramat Gan and was founded in 2008 by Attorney Keren Mandelboim. We work with a personal and dedicated approach, and each client is an important matter for us. If you are selling a second property in Ramat Gan or the surrounding area, we are here to help you.