Understanding TAMA 38 and its legal implications

Givati Law

all about tama 38

Urban renewal – it’s like the glow-up trend for cities! Israel has also jumped on this trend and is attempting to provide their concrete jungles a makeover as well. That’s where TAMA 38, TAMA 38/2, and Pinui-Binui come into play. These legal frameworks aren’t capes-and-tights kind of heroes, but they do work some magic in reviving existing buildings, making them safer (Earthquake “proofing”), and giving neighborhoods a fresh lease on life.

Originally, the Urban Renewal Laws were put in place in order to strengthen older buildings to withstand earthquakes (buildings that received their building permit prior to 1980), with the intent of having it mainly in the periphery cities of Israel. But of course, the value of real estate is much greater in the center of Israel, so many developers chose to mostly work in these areas and not in the periphery. There are/were intents to cancel some of the options under the umbrella of Urban Renewal, but for the time being it seems like it’s still continuing. In addition, urban renewal has become a crucial aspect of city planning and future development, especially in densely populated areas. Take Jerusalem as an example – a city that doesn’t really have where to expand to, so many of the new construction projects are completed under Urban Renewal laws.

Let’s explore the different Urban Renewal options:

TAMA 38/1 – Strengthening Existing Buildings

TAMA 38/1 focuses on reinforcing and improving the safety of existing apartment buildings. This plan allows property owners to make significant structural enhancements without tearing down the entire building. Here are the key features of TAMA 38:

  • Reinforcement and Expansion: The main features added are “mamadim” (safe rooms) which start from under the ground and extend all the way up to the top of the building, where the existing building is then “attached” in order to reinforce the building’s structural integrity. Additionally, the builders usually add an extra layer of cover to the existing building.
  • Increased Apartment Space: Under TAMA 38, apartments can be expanded by up to 25 square meters including the mamad, which means there can be additional space added to the apartment in addition to the mamad.
  • Legalization of additions: Any previously illegal additions to the building can be legalized, but must be included in the above mentioned 25 square meters.

In addition, an elevator is added to the building and usually balconies are added as well. Balconies, however, must not exceed 12 square meters (including any existing balconies). They also cannot go over the Tama line (zoning line in the building’s zoning plans) so if the existing building is close to that line, there might not be space to add the full 12 square meters of balconies, if at all. Lastly, their feasibility depends on the specific building’s design.

TAMA 38/2 – Demolition and Reconstruction

TAMA 38/2 is a more extensive version of TAMA 38/1 and involves demolishing the existing building entirely to make way for a new one. Key features of TAMA 38/2 include:

  • Demolition and Reconstruction: The entire building is torn down, and a new one is constructed in its place, including an elevator, mamad and balconies as in Tama 38/1. Another prerequisite by the authorities these days, especially in Tama 38/2, is adding parking spots and storage units to every apartment. That being said, if the existing apartment already had a parking spot and/or a storage unit, the owners will not receive an additional one. 
  • Legalization of additions: Same as in Tama 38/1, any previously illegal additions to the building can be legalized, up to 25 square meters.

People often ask “Which is better, Tama 38/1 or 38/2?” In general, Tama 38/2 is much more expensive, so for it to have economic feasibility, the authorities have to approve more building rights to the existing building. This means that buildings without enough ground space around them, or that have limitations to the number of floors that can be added would have to choose the 38/1 option. But with Tama 38/1 you don’t usually change the existing infrastructure (water, electricity, sewerage), and the additional space added to the apartment might not be ideal with the existing layout, and therefore Tama 38/2 would be a better choice. With Tama 38/2, you get a brand new building with a better layout and often with additional amenities, which makes it a preferred choice when possible. 

Pinui-Binui – A Neighborhood Transformation

The “Pinui-Binui” transaction is essentially Tama 38/2 but on a much larger scale. It entails vacating existing residential areas (usually a few parcels of land which include several buildings at the minimum) to make room for the construction of new extensive buildings within the same complex/project. Existing tenants have the opportunity to exchange their old apartments for new ones in a modern neighborhood with enhanced environmental infrastructure, and sometimes even get more than one apartment in return for their existing one.

The size of the new apartment is determined through negotiations with the developer, taking into consideration economic feasibility.

Tax Implications

Understanding the tax implications of these urban renewal laws is crucial for property owners and investors:

Sale Tax Exemption: In both TAMA 38/1 and TAMA 38/2, when you engage in the urban renewal process, legally it’s considered as if you’ve sold the property to the builder at the beginning of the project and bought it back once the construction is finished. In a regular transaction, an owner would have to pay capital gains tax on the sale of the apartment (to the builder) and purchase tax when buying it back, but under Tama 38, both the sale and purchase are exempt from the tax. In addition, there is an exemption from paying betterment tax (local municipal tax) on the additional building rights.

Despite the exemption mentioned above, it’s important to note that the timing plays a significant role in being able to use these exemptions. Some owners like to take advantage of such projects, and try to sell their apartment with the increased value of approved additional space but without waiting for the project to be completed. If an owner sells their apartment at the “wrong time”, it could potentially lead to waiving the ability to use the exemptions on capital gains and betterment taxes, and the seller might have to pay hefty sums in taxes. It’s crucial to consult with an attorney to ensure taxes are not paid unnecessarily. 

TAMA 38/2 and Pinui-Binui: If someone owns multiple apartments within the same building, only one dwelling is entitled to the tax benefits established by law. That being said, this point could be negotiated with the builder prior to signing the agreement – that all taxes will be paid by the builder. Depending on the economic feasibility of the project, builders might agree to take such taxes upon themselves.

In summary, TAMA 38, TAMA 38/2, and Pinui-Binui transactions offer valuable opportunities for urban revitalization in Israel. These programs provide various incentives for property owners and contribute to the overall improvement of living conditions and cityscapes. However, navigating the intricacies of these laws and their tax implications requires careful consideration and professional guidance and it is highly recommended to utilize a real estate attorney for guidance during this process.

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