When selling a property in Israel, understanding Mas Shevach, or capital gains tax, is essential. This tax applies to the NET GAIN from the sale of a property. While the rules can be complex, there are deductions that can significantly reduce your tax liability and exemptions which could fully mitigate it. Here’s a breakdown of how Mas Shevach works and strategies to minimize its impact.
Basic Overview of Capital Gains Tax
The general rule is that capital gains is a 25% tax on the net gain. Unlike in the U.S., where tax is also paid on inflation, Israel adjusts for inflation in its calculations. For example:
If you purchased an apartment for $1 million 10 years ago and sell it now for $2 million. You take the purchase price and adjust it to its present day value.
So if $1 million 10 years ago in today’s value is $1.2 million, the net gain will be $800,000, not $1 million.
You would then pay 25% tax on the $800,000 gain, not on the full $1 million.
Capital Gains tax is not paid on inflation.
Deductions That Lower Your Tax Liability
Several deductions can reduce your taxable gain:
Legal and Agent Fees: Costs for lawyers and agents for both the purchase and sale of the property are deductible.
Purchase Tax: The tax paid when initially purchasing the property can be deducted.
Mortgage Payments: In some cases, part of the interest payments on your mortgage payments may also be deductible.
Upgrading Expenses: Expenses incurred for upgrading your property during the ownership period are also deductible. For example, the cost of renovations, upgrading your AC systems, installing underfloor heating, additions to the apartment such as balcony, secure room (known as Mamad) etc., are all deductible expenses. Keep in mind that in order to deduct these, you must keep the receipts for your payments.
Inflation Adjustment: All of the expenses listed above are also adjusted to inflation from the time they were paid until the sale date.
Exemptions from Capital Gains Tax
The law gives an option to sell a home you own, exempt from Capital Gains Tax (similar to 1031 exchange in the US), under certain conditions, among them:
You must be an Israeli resident at the time of the sale.
The property sold must be your sole residence.
You have been the owner of the apartment for no less than 18 months from the time the apartment was purchased, or 18 months from the time the letter of occupancy has been obtained in case of a purchase in a new construction.
The sale price must not exceed 5,008,000 shekels.
For properties sold over this amount, the exemption applies prorated to the first 5,008,000 shekels, at a rate of 25% capital gains tax on the net gain.
Special Circumstances
Upgrading Your Home:
If you buy a new property before selling your existing one, you can still claim a tax exemption by declaring to the tax office that you will sell the first property within 18 or 24 months (depending on when the original apartment has been purchased) of signing the new purchase agreement. This ensures you qualify for both the exemption and the lower purchase tax rate associated with single residency (Read more about purchase tax rates and discounts here: https://givatilaw.co.il/planning-your-aliyah-purchase-tax/).
To be able to use the exemption you must be an Israeli resident at the time of the sale.
Partial Ownership:
You may still be eligible for the exemption even if you are a partial owner of an apartment, as long as your share does not exceed the following thresholds:
You do not own more than a ⅓ of an additional apartment/s.
You do not own more than ½ of an additional apartment/s which you inherited.
If you inherited an apartment and own more than ½ of of the inherited apartment, you could be exempt under the following conditions:
The heir is a spouse of the deceased and/or a child and/or a grandchild of the deceased or a spouse of one of the above.
The deceased was the owner of one apartment only.
To be able to use the exemption you must be an Israeli resident at the time of the sale.
Inherited apartment:
If you own an apartment, but inherited another apartment, you could sell the inherited apartment, under the following conditions:
The heir is the spouse and/or a descendent of the deceased and/or any of their spouses.
The deceased did not own more than 1 apartment at the time of his/her passing (not even a partial owner of another apartment).
The deceased was eligible to sell his apartment with an exemption if he/she was alive at the time of the sale.
To be able to use these exemptions you must be an Israeli resident at the time of the sale.
Linear Discount for Long-Term Owners:
For properties purchased before January 1st, 2014, a special discount may be applied. Here’s how it works:
You calculate the full Capital Gains Tax based on the net gain as detailed above.
Divide the capital gain calculated by the number of days the property was owned, from the day it has been purchased until it was sold.
Any portion of the gain accrued before January 1, 2014, is exempt from tax.
Tax will have to be paid only for the portion of the gain accrued after this date.
The longer you’ve owned the property, the less tax you’ll owe, as pre-2014 gains are exempt. Conversely, the later you sell, the more tax you’ll pay.
This discount may be applied even if you are NOT an Israeli resident at the time of the sale.
Mas Shevach can seem daunting, but understanding its rules, utilizing available deductions and exemptions and planning ahead, can significantly reduce your tax burden. Whether you are selling your apartment, upgrading to a new home, or leveraging long-term ownership discounts, it’s important to consult a knowledgeable real estate lawyer to guide you through the process and ensure compliance, and tailor the details specifically to your needs and circumstances.
If you’re considering selling property in Israel or want to learn more about capital gains tax, feel free to contact us. We’re here to simplify the process and help you maximize your benefits.
