Purchase tax is back to 8%
In a move to address the dynamics of the real estate market, the purchase tax brackets for investment apartments in Israel underwent revision in July 2020 under the stewardship of Finance Minister Israel Katz. At that time, the tax was reduced to 5%. However, recent developments indicate that the tax is now set to increase once again.
According to a new bill, the purchase tax for investors is expected to rise from 5% to 8%, potentially taking effect as early as next week. In addition, the tax brackets will undergo significant changes, transitioning from five steps to just two. Going forward, buyers of non-primary residences will be subject to an 8% tax on the first shekel up to a value of NIS 5,348,565 million. Any amount exceeding this value will incur a tax of 10%. The specific thresholds that determine the tax brackets are updated annually based on the housing price index.
Following the tax reduction in July 2020, there has been a notable increase in the number of apartment purchases made by investors over the past year. The Chief Economist at the Ministry of Finance conducted a recent survey revealing that in July 2021 alone, investors acquired 2,600 apartments out of a total of 13,800, marking a three-fold increase compared to July 2020 and an 80% surge from July 2019. The trend continued in June 2021, with investors purchasing 2,900 apartments. In July of this year, investors accounted for 20% of all apartment transactions.
Interestingly, this tax adjustment reflects a return to the previous model implemented by former Finance Minister Kahlon in 2015. The purchase tax remained unchanged until July 2020 when Finance Minister Israel Katz opted to reduce it to 5% (with bracket steps of 6%, 7%, 8%, and 10%) as a measure to support the housing market amidst the challenges posed by the pandemic.
It's important to note that the purchase of a first or only apartment grants an exemption from the purchase tax on the portion of the property's value up to NIS 1.74 million. The tax brackets for these cases remain unchanged this year, with the first bracket set at 3.5% for the value portion between NIS 1.74 million and NIS 3.81 million, and subsequent brackets of 5%, 8%, and 10% for luxury apartments.
Will the tax increase deter investors from pursuing real estate investments? Certainly not. Investing in Israeli real estate remains one of the most secure investment options, and a mere 3% difference in tax does not diminish the sector's attractiveness.
Now, let's examine how this tax adjustment impacts your annual yield using a hypothetical scenario, disregarding certain expenses:
Property price – 1,000,000 NIS
Significant fees – 30,000 NIS (agent and lawyer fees)
Current purchase tax – 5% (50,000 NIS)
Monthly rent income – 3,000 NIS
Annual yield from rent – 3.333%
Property price – 1,000,000 NIS
Significant fees – 30,000 NIS (agent and lawyer fees)
New purchase tax – 8% (80,000 NIS)
Monthly rent income – 3,000 NIS
New annual yield – 3.272%
Difference: ~0.06%
As demonstrated, an increase in the purchase tax impacts your initial investment sum but does not significantly affect your annual yield.
Who does the new purchase tax affect? The tax is imposed on investors and foreign buyers. However, if you are a resident of Israel or planning to make Aliyah (immigrate to Israel), your tax brackets work differently, granting you a full exemption for the portion up to 1.74 million NIS.
In conclusion, as the landscape of purchase tax undergoes changes in Israel, it is important for investors and buyers to stay informed about the evolving regulations. While the tax increase may have an impact on initial investment amounts, the enduring appeal and stability of the Israeli real estate market continue to make it an attractive choice for prospective investors.