Taxation of New Apartments in Tama 38 — Comprehensive Legal Guide

Taxation of New Apartments in Tama 38 — General Overview

Tama 38 (Plan 38) is an urban renewal program that enables the demolition and reconstruction of old buildings in Israel. Purchasers of new apartments in such projects encounter complex legal and tax questions, regarding both land appreciation tax, alternative housing, and implications for mortgages and insurance. This guide explores every aspect of taxation in Tama 38, so you can understand your rights, obligations, and legal planning options available to you.

As attorneys with over 18 years of experience in real estate and property law, the Mandelbaum, Gor, Witzman-Gor & Co. law firm in Ramat Gan handles new apartment transactions in Tama 38 at a significant scale. We guide purchasers from the initial stage of apartment selection through registration in the Land Registry, while protecting their legal and tax rights.

What is Tama 38 and Why Does It Affect Taxation?

Tama 38 is a special program that encourages renovation and renewal of old neighborhoods in Israel. Within a Tama 38 project, existing residents of the original building are entitled to alternative housing (temporary or permanent) while construction takes place. After construction completion, existing residents are entitled to a new apartment in place of their original apartment, sometimes with additional monetary compensation.

From a tax perspective, the situation of a new apartment in Tama 38 differs from regular purchase. The land on which the new apartment is built is considered, in certain respects, "old land" for purposes of calculating land appreciation tax, because it is part of an existing asset (the original building) that has been demolished and reconstructed. This may affect the amount of land appreciation tax and the tax benefits to which purchasers are entitled.

Land Appreciation Tax in Tama 38 — How Is It Calculated?

Land appreciation tax is a tax levied on the gain created due to an increase in property value between purchase and sale (or between purchase and Land Registry registration). For a new apartment in Tama 38, the calculation of land appreciation tax depends on several factors:

• Purchase price of the new apartment — This is the basis for calculating land appreciation tax. Any increase in property value beyond this price will be subject to tax.
• Date of acquisition of the original land — Generally, for purposes of calculating land appreciation tax in Tama 38, the acquisition date of the original land by existing residents (or land valuation at a certain date) is considered, not the acquisition date of the new apartment by the new purchaser. This may benefit the new purchaser, as it extends the period and thus may reduce the annual appreciation rate.
• Tax benefits — In some cases, tax benefits are available for purchasers in Tama 38, particularly if they are existing residents receiving alternative housing or a new apartment in place of their original apartment.

Alternative Housing — Tax Rights and Obligations

Alternative housing is temporary accommodation provided to existing residents during construction. From a tax perspective, alternative housing can be a complex issue:

• If you are an existing resident — Generally, alternative housing is not considered a new purchase for land appreciation tax purposes. It is considered part of a "transaction" that includes the original apartment and the new apartment in Tama 38. However, because it is a separate asset, questions arise regarding the calculation of land appreciation tax on the alternative housing itself.
• If you are a new purchaser — If you purchased alternative housing from an existing resident (i.e., you purchased their temporary accommodation), land appreciation tax will generally be calculated as for any other apartment, but with consideration of the relevant acquisition dates.
• Purchase tax — Alternative housing is subject to purchase tax like any other apartment, unless there is a specific tax benefit under the Tama program.

Mortgage and Insurance in Tama 38

Purchasers of new apartments in Tama 38 sometimes hold a mortgage on the apartment. Two important legal questions arise here:

• Mortgage security — The bank or lender will request security on the new apartment. In Tama 38, there are sometimes complex legal procedures in which security is transferred from the old apartment to the new apartment. It is important to ensure that the security is properly arranged to avoid legal risks.
• Apartment insurance — Generally, the bank will require insurance on the new apartment (building insurance and employer liability insurance, if applicable). In Tama 38, there may be a transition period during which insurance must be updated for both the alternative housing and the new apartment simultaneously.

Tama 38 and Housing — Are There Tax Benefits?

In recent times, certain tax benefits are available for purchasers in Tama 38, primarily if they are existing residents. However, these benefits change according to legislation and administrative directives of the tax authority. In any case, it is important to verify your eligibility with a tax advisor or real estate attorney to ensure you are taking advantage of all available benefits.

In-Depth: Typical Scenarios and Practical Examples

To better understand the tax implications of a new apartment in TAMA 38, let us examine several typical scenarios:

Scenario 1: An Existing Tenant Receiving a New Apartment under TAMA 38

Yosef is an existing tenant in a building in Tel Aviv that is undergoing TAMA 38 renovation. His original apartment was purchased in 1995 for 150,000 shekels. Today, in 2026, the new apartment under TAMA 38 that he receives in exchange is valued at 1,200,000 shekels (including a cash addition). For purposes of capital gains tax, the basis for calculation will typically be the date of purchase of the original apartment (1995) and its value at that time (150,000 shekels), not the date of receipt of the new apartment. This means that the appreciation is calculated over a period of approximately 31 years, which can lower the annual appreciation rate and thereby reduce the total capital gains tax.

Scenario 2: A New Buyer of a New Apartment under TAMA 38

Michelle purchased a new apartment under TAMA 38 in Ramat Gan, pursuant to a purchase agreement executed in 2025. The purchase price is 1,100,000 shekels. Two years later, the apartment is mortgaged and its value increases to 1,300,000 shekels. If Michelle sells the apartment in 2027, she will pay capital gains tax on the difference between the purchase price (1,100,000) and the sale price (1,300,000), namely on 200,000 shekels. However, if Michelle is an existing tenant in the original building, she may be entitled to tax benefits that will reduce the tax.

Scenario 3: An Alternative Apartment Sold to a New Buyer

Danny is an existing tenant who received an alternative apartment while construction of the TAMA 38 project is ongoing. He decided to sell the alternative apartment to a new buyer, Abraham. The sale price is 900,000 shekels. For purposes of capital gains tax, Abraham (the new buyer) will be subject to capital gains tax on the profit between his purchase price and any future sale price. However, if Danny used the alternative apartment as his primary residence, he may have certain tax rights when selling the apartment.

Comparison Table: Types of Taxes and Typical Cost Ranges in Tama 38

Below is a table comparing the common types of taxes in apartment transactions under Tama 38, typical cost ranges, and factors affecting the amount:

Important Note: The data in the table are general estimates only. Each case is examined individually, and actual amounts may vary depending on specific circumstances, current legislation, and Tax Authority decisions. When making a legal or financial decision, it is important to consult with a qualified attorney and a professional tax advisor.

Frequently Asked Questions and Important Legal Clarifications

Tax Benefits in Tama 38 — What Exactly Are They?

In recent times, there are certain tax benefits designed to encourage older residents to participate in Tama 38 and receive new apartments. These benefits may include discounts on capital gains tax, discounts on purchase tax, or certain exemptions in special cases. However, these benefits are not automatic — you must request them from the tax authority, and typically appropriate legal documentation is required. Our office will help you identify your entitlements and submit requests with proper evidence.

Do I Need to Pay Capital Gains Tax on a Replacement Apartment?

This is a complex question. If you are an older resident receiving a replacement apartment as part of a Tama 38 transaction, you generally do not pay capital gains tax on the replacement apartment itself, because it is considered part of a "transaction" that includes both the original apartment and the new apartment. However, if you sell the replacement apartment to another buyer, or if there are special circumstances, there may be a capital gains tax obligation. Each case depends on its specific facts, and an experienced attorney can assist you with this.

How Does a Replacement Apartment Affect My Mortgage?

A replacement apartment can affect your mortgage in several ways. First, if you have a mortgage on the old apartment, the bank will request to transfer the security to the new apartment. During construction, you may need to obtain a temporary mortgage on the replacement apartment, or begin paying the mortgage on the new apartment before it is completed (depending on the contract terms). Second, the bank will require insurance on the replacement apartment as long as you occupy it. It is important to communicate with the bank while in the planning stage to understand all your requirements and obligations.

What Is a "Tabu Extract" and Why Is It Important in Tama 38?

A Tabu extract is a legal document describing the registration of the property in the Tabu (the land registry authority in Israel). In Tama 38, the Tabu extract of the new apartment can be complex, as it may contain notes regarding the replacement apartment, mortgages, or rights of older residents. It is important to review the Tabu extract carefully to ensure that all your rights and obligations are properly registered. An attorney can help you understand the extract and identify any potential issues.

What Should I Do If I Believe the Tax Authority Calculated My Tax Incorrectly?

If you suspect that the tax authority miscalculated your capital gains tax or purchase tax, you have the right to appeal its decision. Typically, you have a certain period (usually 30 days) to file an appeal after receiving the tax notice. An attorney or tax consultant can help you prepare the appeal, gather evidence, and represent you before the tax authority or the relevant court.

Is There a Difference Between a New Apartment in Tama 38 and a New Apartment in Regular Construction in Terms of Taxation?

Yes, there is a significant difference. In a new apartment under Tama 38, the calculation of capital gains tax may differ because it may be based on the acquisition date of the original land (of the older residents), not on the acquisition date of the new apartment. This can be to your advantage, as it extends the period of land ownership and thus reduces the annual appreciation rate. Additionally, Tama 38 may have specific tax benefits not available in regular new apartments.

What Happens If the New Apartment in Tama 38 Is Not Completed on Time?

If construction is delayed, there may be legal and financial consequences. For example, if you have a mortgage, the bank may impose delay fees or change the terms of the loan. Additionally, if you are paying rent on a replacement apartment, you may need to continue payment until the new apartment is completed. In terms of taxation, a construction delay may also affect the calculation of capital gains tax, depending on the circumstances. It is important to carefully read the purchase agreement and understand your rights in case of delay.

Am I Entitled to a Benefit as a First-Time Homebuyer in Tama 38?

This depends on the circumstances. If this is your first apartment, you may be entitled to tax benefits for first-time homebuyers, such as a discount on purchase tax or an exemption from certain capital gains taxes. However, in Tama 38, if you are an older resident receiving a new apartment, these benefits may generally not apply, because you already own an apartment. Each case depends on its specific facts, and it is important to consult with a tax advisor or attorney.

What Are the Main Legal Risks in a Tama 38 Transaction?

The main legal risks include: (1) issues with transferring mortgage security from the old apartment to the new apartment; (2) construction delays that may affect the mortgage and insurance; (3) disputes regarding the rights of older or new residents; (4) problems with calculating capital gains tax or purchase tax; (5) disputes regarding renovations or additions to the apartment. Our office specializes in addressing these risks and can help you avoid them or resolve them if they arise.