Published December 9, 2011 by Tzvi Shapiro

Choosing a house graphicFor many young couples beginning their lives together, as well as for other families, the dream of buying a home has become a dream that is difficult to achieve.

Notwithstanding the usual dilemmas such as location, size and other parameters, the issue of financing poses an even more daunting prospect. In fact, the financial aspect is the most vital element of all since it affects all the other details.

With the current state of the property market in Israel, it is almost impossible to obtain your dream home. No matter where and when you purchase a home, there will always be compromises, but these days, even further compromises have to be made.

A sellers market

In Israel, the price of property seems to be inflated beyond any comparative scale. Several explanations are often offered to explain the high level of property prices in Israel.  Some blame foreign investors for driving up the prices because they buy vacation homes in Israel while others blame the government for lagging in long-term development plans.

The market in Israel is a “Seller’s market”. That means that for any property available in a prime location, there are going to be many bidders. This allows the sellers to be picky, set a high standard and not compromise – which puts the buyers in a quandary.

Fortunately, the Israeli government has recognized the situation or possibly even heard the outcry of many young couples and families. The government has adopted the challenge to rectify the situation and help make the dream of buying a home in Israel more attainable.

To this end, and in order to try and fight the high rate in which the prices of property have increased, a new reform was passed in stages by the government from mid November to mid December 2010.

All the steps in the reform are directed towards trying to transform the “Seller’s Market” phenomenon. Some components focus on the short term, while others focus on the long term:

1.  Incentive for Builders

The first step the government took was to try and make more land available to builders, so that the supply of homes will increase. An increase in supply should cause property prices to decrease.

In order to create a greater supply of homes, the government has decided to give incentives to builders by granting a 15% discount on the purchase of land in tenders of the Israel Land Administration – assuming the builders complete 80% of the project within 30 months.

Building large projects within 2.5 years is not an easy task, but a 15% discount is a significant incentive that is sure to have an effect.

This is more of a long term measure, as it will affect the market in 2.5 years, but it ensures that there will be more properties available, for a better price. However, the expectation of a greater supply in the future may affect current prices as well.

2.  Historic Betterment Tax Reduction on Land Sales

The property tax in Israel is much more complicated than in other countries. In many countries, the sale of properties falls under Capital Gains Tax. In Israel there is a special tax when it comes to properties, and it is rather complex.

Under Israeli law, one would pay different tax for selling a property depending on the date it was purchased. The law went through many changes throughout the years, which made it more complicated until the major reform that took place in 2001.

That being said, the reform mostly affected properties purchased after this reform was put into place. Tax for selling older properties is still very complex, and the year one’s property was purchased could make a huge difference in the tax which will have to be paid.

Tax could even go as high as 50% on the gain.

In order to give incentive to land owners to sell their properties and increase the supply, the government reduced this tax on older purchase properties from an average of 45% to 20%.

This is more of a “medium” term step, as it won’t create more properties immediately but will apply not just for big building projects that take a long time to build, but to smaller ones as well.

3.   Investors and Home Owners

This last step to be adopted aims to encourage investors/owners of more than one home in Israel to sell their home(s) with higher profit, while on the other hand discouraging them from buying additional homes by making it more expensive for them.

Selling Incentives

Prior to this step being implemented investors/home owners could sell one apartment every 4 years with a tax exemption. Without this exemption the sale would be taxed at regular rates. Thus, owners of several apartments would often wait and sell only one apartment every 4 years in order to obtain the tax exemption.

With the intention of providing incentive for the investors/owners to sell more apartments, for a 2 year period, the government will give a tax exemption for the sale of any second or third apartment as well. Through this, the government is pushing owners to sell, as they can have higher profits, which will again create a greater supply that will lead to lower prices.

This is a short term step, as it will be valid for a period of 2 years only, and will increase the number of apartments available immediately.

Buying Disincentives

This step will apply only for investors/owners who own more than one apartment. (If you are planning to buy your first home or sell and then buy a new one, don’t worry, this won’t affect you).

This measure doesn’t target the “weak” but rather the “big” and “strong” buyers that will pursue the properties that will (hopefully) become available as a result of the Selling Incentives.

When buying a property, a purchase tax must be paid – no matter what the circumstances are. There are no exemptions from this tax like there are with the Betterment Tax, but there are some alleviating factors depending on the situation. If it’s a buyer’s first apartment, or if the first will be replaced with another within a limited period of time, the tax paid will be significantly less. But if it’s an apartment beyond the initial apartment, the purchase tax will be higher.

The new measure will make the purchase tax – for the purchase of supplementary apartments – even higher. Up until now, the tax was between 3.5% and 5% – depending on the purchase price. After the change is implemented, the tax rate will start at 5% and go up to 6% and 7%. This will make the purchase of an investment apartment far more costly and possibly not even worthwhile.

This is also a short-term step as it will only be valid for a period of 2 years. But in order for the prices of property to drop, it is a step that must be taken to prevent investors buying the apartments made available. By creating a deterrent for investors to buy these new apartments, the government complements its Selling Incentives.

The government is aware that the predicament of the housing market cannot continue and reforms need to be enforced in order to bring about change. The government recognizes that owning your home should be an entitlement for every citizen, and not just for the privileged or select few.

Yair Givati, Esq.

Partner, Haim Givati & Co. Law Offices

The writer specializes in Property and Tax Law

The information herein should not be taken as legal advice and may have been changed since published. Do not treat information provided in the article as a recommendation to act or refrain from taking action, or as legal advice. The information provided is not a substitute for the assistance of a licensed advisor.

Related: Get pre-approved for a mortgage and current interest rates in Israel.