Israeli real estate taxes among world's lowest

Accounting firm Baker Tilly finds that Israelis pay less taxes on real estate deals compared with other countries.

Accounting firm Baker Tilly reports that Israelis pay less taxes on real estate deals compared with other countries.

But there is a fly in the ointment. The relatively low taxes on buying and selling, compared with the rest of the world and with other investment options, have made Israel's housing market a paradise for investors. These investors are fuelling the market, increasing demand in recent years (clearly encouraged by low interest rates) and have been a significant factor in home price rises. Consequently young couples looking to buy an apartment - which still includes 30% in taxes - have little to console them.

The taxes examined are purchase tax paid on purchase of a property, tax on rental (by maximum tax bracket), and capital gains tax on the sale of a property. Israel was compared with Canada, Australia, Spain, Russia, the US, France and Japan.

For the purposes of the comparison, an imaginary apartment was purchased for NIS 1.5 million, assuming that NIS 48,000 rent could be obtained annually for a NIS 4,000 per month (3.2% return). The apartment was then sold for NIS 1.8 million. First hand and second hand apartments were calculated separately.

Landlors can draw encouragement from the fact that Israel has the lowest tax of any country examined. Israel is somewhere in the middle on capital gains tax; tax rates (on second hand apartments) are higher than in Spain, the US and France but lower than the tax paid on the same apartment in Canada, Australia, Russia and Japan.

While homebuyers in Israel pay 5% purchase tax (and in the case of first homes less), the Spanish pay 8%, the French 7%, and in Japan tax is just 4%, while in Canada it moves between 0.5% and 1.5%. However, in Australia and Russia there is no purchase tax. In the US the tax rate is different in each state and is therefore not included in this comparison.

Baker Tilly Israel partner and tax manager Guy Reshtick said, "Tax in Israel is not as high as people think. Taxes are high in Israel but in matters relating to real estate tax, our situation is improving. There have been changes over the years that have lowered the sums required from apartment sellers and buyers. For example, betterment tax that in the past amounted to 50% of capital gains fell to 20% a decade ago - and that is a direct profit for apartment sellers."

He added, "And here too apartment sellers are given a complete exemption from betterment tax on the sale of an apartment once in every four years. That said the Minister of Finance declared that from 2013 the betterment tax exemption will be cancelled for owners of second homes."

One way or the other, data recently published in a survey by the Association of Contractors and Builders in Israel found that in 2010 the state collected NIS 11.5 billion from real estate taxes and VAT on new apartments. This is tens of percent more than 2009 and stems from a rise in deals, and to some degree the rise in prices. This year too the trend continues with the state's take from real estate taxes rising 35% from January to May 2011. According to the calculations of the Association of Contractors and Builders taxes (paid by homebuyers and contractors) represent 30% of the price of a new home, not including the cost of land.

The Association of Contractors and Builders claims that the taxes imposed on contractors and buyers are among the highest in the world. Association of Contractors and Builders president Nissim Bublil said that comparing specific taxes only showed part of the picture. He said, "There are taxes that I can say for sure are only imposed in Israel. Betterment tax and development levies bring us up to the world's highest taxes.

In any event, BDO Ziv Haft managing partner and head of the real estate tax department Tareq Dibbini thinks it would be right to cancel purchase tax. He said, "It is an indirect tax that prevents deals and therefore is not really efficient. This tax is not taken from any profit but is 5% of the deal, which might make a deal not worthwhile.

Published by Globes, Israel business news - www.globes-online.com - on July 4, 2011

© Copyright of Globes Publisher Itonut (1983) Ltd. 2011

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