Upon sale of real property in Israel, the State of Israel imposes on the seller “betterment tax” (in Hebrew, “Mas Shevach”), under the Israeli Land Taxation Law (Betterment and Purchase) of 1963. This tax, a kind of capital gain tax, is computed based on the increase in the value of the land between the purchase and the sale, meaning – on the difference between the purchase price and the current sale price.
This tax (Mas Shevach) is an advancement applied to the annual income tax, imposed on the revenues of the citizens of the State of Israel. When the seller is a “common” Israeli resident, he is required to file an annual tax return in Israel, which sets forth his entire income, including the profit derived from the sale of real estate. The annual tax return reflects the final tax liability. When this “end of year” accounting is made, it sometimes turns out that the seller is entitled to substantial tax refund from the State, for taxes paid in access (or, owing additional tax). Similarly, it might be worthwhile for someone who is not an “Israeli resident” (namely, a “foreign resident”), with no revenues in Israel (other than the proceeds of the sale of land), to prepare and submit an annual tax return in Israel; Submitting such return may earn him a significant tax refund on Israeli real estate transactions.
There might be a few grounds for a tax refund:
1. The capital gain rate for individuals is presently 25%; however, this is true only for the period starting November 2001 (the gain, or – profit, is “linear” – generally applied to the entire term of the purchase date through the sale date). When selling land that was acquired prior to November 2001, tax will be computed pursuant to the standard marginal tax rate (“Tax Brackets”). Because during the year the tax authorities do not have sufficient information about other taxable income of the foreign individual, then the tax office basically calculates the tax advancement on the maximum tax rate (in the year 2012 – 48%). Thus, upon filing his annual tax return, if the seller is found entitled to benefit from lower tax brackets, he might earn a tax refund (between 30% and 48%, and sometimes even less). One may also use “income spreading” (in Hebrew – “Prisat Mas”) over the few preceding years, a tool that can even enhance the tax refund on Israeli real estate transactions.
2. Out of the profit earned on the sale of land, one may off-set capital losses and gain a tax refund. These losses do not necessarily derive from real estate, but such from sale of business equipment or financial instruments (such as negotiable or non-negotiable securities). Some cases might justify checking whether the capital losses derive from sales in previous years, and whether, after appropriate filing and reporting, they might be used to set-off against the profit from the sale of the land.
3. Miscellaneous expenses, which have not been set-off when computing the tax advancement, but are now worth re-consideration as set-off of the profit on the annual year return.
It is very important to note that, prior to applying to the tax authorities for tax refund on Israeli real estate transactions, one should conduct a thorough review of the various tax consequences. Each option might include tax advantages, but also might contain tax traps, each case and its unique circumstances.
We advise that every move related to the tax authorities, and even filling out tax forms, be taken after consulting an appropriate professional to avoid tax traps, some of which the seller is not even aware of.
Do not hesitate to contact us to inquire and consult about specific cases.
Ishay Etsion, CPA (Isr.)
Tali Rosen, attorney at law (admitted in Israel and New York)