The tax measures adopted in recent years affecting foreign residents and real estate investors bring in hundreds of millions of shekels to the state’s coffers. But do they also factor among the causes of the land purchase drop seen in 2015?
Moshe Kahlon Photo Credit: Yonatan Sindel/Flash 90
It doesn’t matter what you do with the real estate asset you bought in Israel – one way or the other, the tax man will get you. An Israeli Finance Ministry decision last year allows local governments to collect double property rate taxes from apartment owners who leave the residences empty instead of renting them out (“ghost apartments”).
Nevertheless, if you considered renting out an apartment you own, don’t forget that the tax authorities will be on your heels to collect on any rent beyond 5,000 NIS per month, averaged over the course of a year.
Another proposal introduced last year by Israeli Finance Minister Moshe Kahlon’s school of thought takes up the issue of a new tax on anyone who holds at least three residential investment properties. According to the pending proposal, such investors will be required to pay a 12,000 NIS per year tax (1,000 NIS per month). Owning a fourth apartment will incur a further tax of 10,000 NIS per annum (a total of 22,000 NIS annually), with a fifth apartment incurring another 15,000 NIS in tax liability per year (a total of 37,000 NIS).
It must be noted that this proposal has attracted much criticism because it imposes a uniform tax on all areas of the county, whether in peripheral towns such as Netivot and Kiryat Shmona or in desirable areas such as downtown Tel Aviv. This flat charge ignores the economic realities and differences among locales or the consequent differences in rent revenue from such properties. In all likelihood, this proposal, if it survives the gantlet of opposition, will be part of the Appropriations Bill for 2017-18
This move of Kahlon’s continues a trend of the last several years adversely affecting real estate investors, especially those who live abroad. Over this period, the state canceled the purchase tax exemption for foreign residents, even if the apartment in question is the investor’s first. In practice, a foreign investor’s purchase tax liability matches that of a resident and thus, an investor must therefore pay 8% tax on property purchases up to 4.89 NIS million. Any amount beyond 4.89 NIS million will be taxed at a rate of 10%.
In terms of new immigrants, they will be granted a tax break whether they purchased a residential or commercial property. The tax rate on such a purchase, as of today, stands at 0.5% for any value up to 1.7 NIS million, and beyond that sum, a full 5%. This benefit is one-time only and is limited to a seven-year period that begins one year before the date of immigration.
In the meantime, the local governments and Israeli Finance Ministry have already begun counting the money they expect to pour into their treasuries in the next few years. Some estimate that the income alone from rates of ghost apartments will reach 15 NIS million. The Israeli Finance Ministry estimates an increase of 30% in tax income for the state as a whole.
How Much Will It Cost Us?
These tax measures may have somewhat of a deterrent effect, but they pale in comparison to the looming threat to foreign residents from auditing by the Anti-Money-Laundering Authority. Last year, the authority launched an unprecedented assault on foreign residents or returning Israelis to combat money laundering and undeclared monetary assets in their possession, with the aim of reducing the amounts of money that enters Israel through tax evaders. This enforcement activity began in 2016 as part of the requirements for Israel to join the Financial Action Task Force group as an observer. To date, the authority has acted by means of monitoring assets deposited in the banking system in terms of the Bank Inspector’s regulations so that any amount suspected of involvement in money laundering, and for which the holder made no report, is immediately frozen.
Will the tax and enforcement policies as described above put a chill on foreign real purchases in Israel?
Bank of Israel statistics indicate that land purchases by foreigners in the second quarter of 2016 dropped by 15% compared to the first quarter – a precipitous decline. Whereas the value of land transactions by foreign residents in the first quarter totaled $145 million, the second quarter accounted for only $126 million.
This points to an ongoing decrease in land purchases by foreigners in Israel. Compared to the same quarter of 2015, the drop to $126 million figure represents a drop larger than the final figure itself – 120% of it – since the total for the second quarter of 2015 reached $277 million.
At the LAGUR portal where this data is monitored, experts explain that “the scale of real estate purchases by foreign residents has been declining noticeably since 2015. Whereas in 2015 the annual total was $918 million, it reached $1.132 million in 2014. Basically, the 2015 figure is the lowest in the last decade, the second-lowest since 2012, when the figure only reached $912 million.”
According to Bank of Israel data, the record years for foreign resident real estate investment were 2005 and 2007, when the annual totals reached $1.564 million and $1.224 million.