Real Estate Taxation Guide — Capital Gains Tax, Purchase Tax and Betterment Levy

Real Estate Taxation in Israel — Complete Guide

Sale, purchase, or division of real estate transactions involve a complex package of taxes and charges. Whether you are selling an apartment, purchasing a property for investment, participating in an urban renewal project, or dealing with an inheritance, you must understand the various taxes: capital gains tax, purchase tax, betterment levy, urban renewal contribution, and more. Each applies under different circumstances, at different rates, and may involve relief provisions or special conditions.

Mandelbaum, Gor, Witzman-Gor and Co. — boutique law firm specializing in real estate and property law — have provided precise legal advice to hundreds of clients on real estate taxation since the firm's establishment in 2008. This guide summarizes the key principles, common examples, and legal planning strategies that can save you thousands of shekels.

Why is Real Estate Taxation So Important?

Unlike ordinary merchandise or service transactions, real estate is subject to three main levels of taxation: taxation on profits (capital gains tax), taxation on acquisition (purchase tax), and taxation on value created in public areas (betterment levy). Each is calculated differently, has different rates, and sometimes there are lawful ways to reduce the burden.

Proper legal planning at an early stage — before signing a contract or submitting an official application — can save significant costs. Conversely, attempting to claim benefits you are not entitled to or errors in reporting can lead to penalties, interest, and tax debt.

Capital Gains Tax — Profit from Real Estate Sales

Capital gains tax is the tax imposed on profit generated from the sale of real estate. It applies when a seller sells real estate for a price higher than the purchase price, and is calculated based on the difference between the purchase price and the sale price, adjusted for inflation and other factors.

Who Pays Capital Gains Tax?

Any individual or entity that sells real estate for a price higher than the acquisition cost. This includes:

• Individuals selling a residential apartment or house — If they lived in the property throughout their entire period of ownership (primary residence), they may be entitled to a full or partial capital gains tax exemption.
• Investors selling investment properties — Since they did not live in the property, they pay capital gains tax at the full rate (typically 25% to 30% of the profit, depending on the profit amount and type of seller).
• Corporations and companies — Capital gains tax applies to them at a different rate than individuals.
• Heirs selling inherited property — Subject to certain conditions, they may receive a step-up in basis based on the property's value on the date of death.

Capital Gains Tax Calculation — Basic Formula

The taxable capital gain is calculated as follows:

Taxable Gain = Sale Price − Purchase Price (adjusted for inflation) − Permitted improvement expenses − Permitted sale expenses

Each step in this calculation is important:

• Inflation adjustment: The purchase price is adjusted for the inflation rate from the date of purchase to the date of sale. This can significantly reduce the taxable gain.
• Improvement expenses: Investments in property improvements (roof renovation, construction of an additional room, electrical and plumbing updates) may be deducted from the gain if properly documented.
• Sale expenses: Realtor commission, legal fees, appraisal costs, and similar expenses can be deducted.

Capital Gains Tax Rates

The rate depends on the type of seller and the size of the gain:

• Individual selling a primary residence: Typically full or partial exemption (depending on conditions).
• Individual selling an investment property: Typically 25% on gains up to a certain amount, and 30% on the excess amount (these rates may change).
• Corporation: Typically 26% (the corporate income tax rate).

Reliefs and Rights in Capital Gains Tax Calculation

There are several reliefs and rights that can reduce or eliminate the tax liability:

• Primary residence exemption: Generally, an individual who sells a home in which they and their family lived throughout the entire period of ownership is entitled to a full capital gains tax exemption. This includes apartments, cottages, and houses in Tel Aviv, Jerusalem, Ramat Gan, and other Israeli cities.
• Partial exemption for joint ownership: If the property owner lived in part of the property and the other part was for investment, the exemption applies only to the part where they lived.
• Reliefs for people with disabilities and seniors: Special tax reliefs are available for people with disabilities and individuals above a certain age.
• Urban renewal reliefs (TAMA 38): Owners of properties in urban renewal projects may be entitled to capital gains tax reliefs or payment deferrals.
• Exemption for forced sales: Under certain circumstances (for example, upon retirement abroad), relief may be granted on the basis of hardship.

Purchase Tax (Registration Fees) — The Tax on the Property Buyer

Purchase tax is a tax levied on the buyer when purchasing real estate. It is paid to the Land Registry Office and is typically calculated as a percentage of the purchase price. It is a fixed tax that applies to every buyer, regardless of profit or loss.

Purchase Tax Rates

The rate depends on the type of buyer, the use of the property, and the purchase price:

• First-time buyer of a residential apartment up to a certain amount: typically 0% (full exemption) or a reduced rate.
• Second or additional buyer, or buyer of an investment property: typically 5% to 10% of the purchase price (depending on the purchase amount).
• Corporate or company buyer: typically 5% to 10%.
• Foreign buyer (non-resident of Israel): typically a higher rate, approximately 10% to 15%.

Example of Purchase Tax Calculation

If a first-time buyer purchases an apartment for 1,500,000 shekels, they may be entitled to a full exemption or a substantial discount. By contrast, if an investor purchases an investment apartment for 1,500,000 shekels, they will typically pay 5% to 10%, i.e., 75,000 to 150,000 shekels.

Relief from Registration Fees

• First-time buyers of residential apartments: full or partial exemption under certain conditions.
• Relief under TAMA 38: buyers in urban renewal projects may be entitled to a discount or deferral of payment.
• Relief for people with disabilities: buyers with disabilities may receive significant relief.
• Relief for the elderly: people above a certain age may be entitled to a discount.

Betterment Levy — The Tax on Property Value Improvement Due to Public Investment

The betterment levy is a charge imposed on property owners when the value of their property increases due to public investment (such as the construction of a road, railway station, electricity, water and sewerage, or a public park). Unlike capital gains tax (which applies to personal profit), the betterment levy applies to the improvement in property value caused by public investment.

Who Pays the Betterment Levy?

Every property owner in an area where a public investment has been made that led to property betterment. This includes:

• Apartment owners in a new neighborhood where roads, electricity, and sewerage have been constructed.
• Property owners near a new railway station or transportation hub.
• Landowners or property owners in an area where public infrastructure has been established.

Calculation of the Betterment Levy

The betterment levy is typically calculated as a percentage of the property value improvement caused by the public investment. The rate is usually 25% to 50% of the betterment (depending on the circumstances and local policy).

Example: If a landowner purchased a plot for 100,000 shekels, and a public investment (such as road construction) increased its value to 200,000 shekels, the betterment is 100,000 shekels. If the rate is 35%, the betterment levy would be 35,000 shekels.

Relief from the Betterment Levy

• Exemption or discount for significant properties: relief exists for properties of very high value or under special circumstances.
• Deferral of payment: in some cases, a deferral of betterment levy payment can be requested.
• Appeal of the betterment assessment: if you believe the betterment assessment is incorrect, you can file an appeal with the local committee.

Contribution to Urban Renewal Project (TAMA 38)

In urban renewal projects (TAMA 38), property owners in the project area may be required to contribute to the costs of renewal. This is not a "tax" in the legal sense, but rather a financial obligation imposed on property owners in the area.

Who Pays the Urban Renewal Contribution?

Property owners in the project area who agree to participate in the renewal (or who have entered into a renewal agreement) may be required to contribute. The contribution is used to cover the costs of relocation, reconstruction, and infrastructure.

Calculation of the Contribution

The contribution is typically calculated as a percentage of the value of the new property after renewal, or as a fixed obligation according to the agreement. The rate is typically 10% to 40% of the value of the new property (depending on the project circumstances).

Rights of Property Owners in TAMA 38

• New apartment at a lower price: often, property owners in a renewal project receive a new apartment at a price lower than market value.
• Capital gains tax relief: in some cases, owners benefit from relief or deferral of capital gains tax on the old property.
• Relief from registration fees: buyers in a renewal project may be entitled to a discount on registration fees.
• Appeal of the contribution: if you believe the contribution is unfair, you can file an appeal with the committee.

Comparison Table — Summary of Real Estate Taxes

The following table summarizes the main taxes, who pays them, and their typical amounts:

Note: The table presents typical ranges only. Actual rates may vary according to legislative updates, government policy, and specific property type. Always consult with the tax authority or a legal advisor for current information.

Legal Planning and Cost Reduction Methods

Proper legal planning can save you thousands of shekels. Here are some ways:

1. Deeds and Taboo — Check Before Purchase

Before buying a property, check the taboo (taboo extract) at the Land Registry office. Ensure there are no outstanding property tax or betterment levy debts on the property, and that the seller is the correct legal owner. This can save you legal problems after purchase.

2. Relief for First-Time Buyers

If this is your first purchase of a residential apartment, make sure you are utilizing your full relief benefits. Exemption from purchase taxes can be quite significant.

3. Documentation of Improvement Expenses

If you plan to improve the property before sale (for example, roof renovation or kitchen upgrade), document every expense with evidence (invoices, price quotes, etc.). Permitted improvement expenses can reduce the profit subject to capital gains tax.

4. Planning of TAMA 38

If you own a property in an urban renewal project, check the terms of the agreement. In some cases, it is possible to defer the contribution payment, or obtain relief based on financial hardship.

5. Appealing Assessments

If you believe the betterment assessment or betterment levy is incorrect, you can file an appeal. In some cases, a successful appeal can result in a significant discount.

6. Planning with Legal Counsel Early On

Legal consultation at an early stage (before signing a contract) can identify relief you were unaware of, or structure the transaction in a way that legally reduces taxes.