The Ministry of Finance recently published a draft of a new law that includes a set of measures to increase revenues for the war-torn economy, some of which relate to real estate, and will have major repercussions for home buyers.
Important measure
Almost all of the real estate-related measures in the bill have one thing in common: freezing the link to the Consumer Price Index (CPI) between 2025 and 2027.
One of the main provisions is the freezing of purchase tax brackets when purchasing an apartment. These brackets will not be revised over the next three years no matter how high the CPI rises. The brackets determine how much tax the buyer will pay based on the price of the apartment, and the higher the price, the higher the tax rate. Those who currently purchase an apartment for up to NIS 1,978,745 do not pay any purchase tax.
As tax experts explain, the meaning of this change is the rise in the price of the apartment: if the exemption level is fixed, and housing prices continue to rise – more people will have to pay more taxes.
Real estate expert Adv. “In the reality we live in, it is clear to all of us that apartment prices will not fall, but will rise.” Ferid Olbiner-Sakel CPA. “If you freeze tax rates, the tax liability practically increases, and that makes the price of an apartment more expensive, and leaves people, who are already having trouble affording an apartment, with a higher cost. This hurts every first-time homebuyer, especially young couples who are struggling to find On the equity of the mortgage, they are affected by every small change in costs.
Expert estate tax attorney. Says Meir Mizrahi, owner of the law firm Meir Mizrahi with A. Rafael & Co., this is perhaps the most important measure in the new bill. “We are talking about collecting huge sums of money every year. In 2023, almost 8 billion shekels were collected from the purchase tax. A three-year freeze is a very long period, during which the index could rise a little, while the tax prices would remain “As it is.”
Hidden measure
One of the items that would also raise taxes, especially on owners of more than one apartment, was hidden because it refers to a tax not related to real estate: the additional tax. This is a tax, currently at 3%, imposed on those whose annual taxable income exceeds NIS 721,560 (as of 2024). The project proposes adding 2% to the additional tax, and also specifies a change that applies to everyone who owns more than one apartment: including the increase in the value of additional apartments in the calculation of taxable income. In the words of the draft law – “The additional tax shall be applied to all income resulting from appreciation, including the sale of apartments, provided that it is not exempt from assessment tax in accordance with the law.” As of today, all apartments worth up to NIS 5.382 million are excluded from the additional tax, and the draft law proposes to secure this exception for an additional apartment.
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circumstance. Efrat Solomon, a partner and real estate tax specialist at Meir Mizrahi Law Firm, explains: Rafael & Co., said this is an important measure, because it effectively adds a new 5% tax to the seller of the property. An apartment with more than one apartment. “The additional tax was considered a tax only for the rich, but since the new clause also includes capital gains from the sale of an apartment, it is relevant for a large number of people. It is enough for a person to sell an apartment that the capital gain is 1 million shekels (i.e. a 1 million shekel difference in price Real, between the value of the apartment when buying and selling), after paying a capital gains tax of 25%, there will be a profit of NIS 750,000 left, which will be taken into account for additional tax purposes, and will require another tax of 5%, or 30% in total – this is a very important issue .
The great importance can be drawn from the draft law itself, which estimates that from this provision alone, the state is expected to benefit from an additional income of 420 million shekels in 2025, and about 520 million shekels in 2029.
The procedure is not surprising
The draft law also includes freezing the tax exemption ceiling of 5,654 shekels per month on income generated from renting apartments, on which the owner does not have to pay tax. This ceiling is also linked to the consumer price index and is reviewed annually, and here too the Ministry of Finance seeks to freeze the link for a period of three years. Therefore, if rents rise and the ceiling does not change, the tax liability will increase. From the perspective of tax experts, this is not a surprising move.
The lawyer says: “For years, we have been hearing different statements from the IRS and the Ministry of Finance about the desire to undermine this exemption.” Mizrahi. “This measure is significant and will of course have little impact on housing rents but in my view it is relatively less important than the other measures mentioned here.”
“The IRS has been fighting landlords for years,” the attorney says. Olpiner-Sakel, “Measures have been taken in this regard, such as the campaign against under-reporting of tax liabilities by property owners. But it must be remembered that for many property owners, the apartment is their only pension, and high taxes will hurt them greatly. “
Today, an exemption from capital gains tax is granted to those who sell their only apartment, as long as the sale amount does not exceed NIS 5,008,000. circumstance. Solomon points out that this is a large amount and includes many apartments on the market, some of which are luxury homes. Above this amount, a tax of 25% is considered very large, so the exemption affects many people. If the exemption ceiling remains the same, a situation may again arise where many apartments will not be considered under this exemption ceiling, although this is a much smaller amount compared to the freeze on attachment to purchase tax brackets.
“The amount of capital gains tax collection, compared to the purchase tax, is less important, and we are not talking about the same amounts,” says the lawyer. Mizrahi, “which shows that it is less important in this case. This is a big tax, but the change is not dramatic in my view.”
Will the bill be passed?
In a challenging period for the Finance Ministry, as officials scramble to find sources for the state’s largest revenues, some test balloons have been released into the air, some of which will not enter into law at the end of the process. Is there a chance the bill will be passed? Mizrahi says: “There is a psychological problem here, because most of the draft’s paragraphs do not explicitly refer to increasing taxes, but rather only talk about freezing the link, which seems more ‘soft’. Therefore, in my opinion, there is a chance for it to be approved.”
“The bottom line is that these changes in property taxes concern a lot of people,” Olbiner-Sackel says. “It is usual to think that this type of legislation hurts the rich, but in our case that is not true. The provisions in the draft will not only hurt the rich, but may “Those who today face the greatest difficulty in obtaining an apartment.”
Published by Globes, Israel Business News – en.globes.co.il – on October 8, 2024.
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