Last week, the Knesset approved a number of bills to counter the economic effects of the coronavirus pandemic. One of these bills was a reduction in the purchase tax for investors in order to help stimulate the construction industry. The term “investors” includes Israelis buying a second—or non-primary—home as well as overseas purchasers.
The previous purchase tax rate for investors and overseas buyers was 8% for the first 5,300,000 NIS and then 10% for the balance. The new, lower rate starts at 5% for the first 1,292,280 NIS, and then rises to 6% for the portion of the purchase price up to 3,876,835 NIS, 7% up to 5,338,290 NIS, 8% up to 17,794,305 NIS, and 10% above that.
Let’s say an overseas buyer purchases an apartment for $500,000. Using a dollar/shekel exchange rate of 3.40, the tax would be approximately $26,200, a savings of $13,800 compared to the previous 8% tax rate. If the purchase price is $1,000,000, the purchase tax would be approximately $56,200, a savings of $23,800.
The new tax cut reverses recent trends. Back in 2013, then-finance minister Yair Lapid raised the purchase tax rate for investors from 3.5% to 5%, and the upward movement continued in 2015 when his successor, Moshe Kahlon, raised the rate to 8%. Kahlon’s stated goal for raising taxes on investment properties was to make them a less attractive investment option. Such actions are called “demand-side” reform because they address the issue of demand: By reducing investor demand, the government hoped to limit price increases, thereby helping young families to have affordable housing opportunities. On the “supply-side” of the equation, Kahlon instituted a number of programs to increase the number of new housing units entering the market, including making more government land available for development by aggressively rezoning land to residential usage, and streamlining the planning and approval process to expedite development.
Kahlon’s “supply-side” goal was achieved, as more land has become available for development, but the “demand-side” tax increase was not a success. The goal of lowering the percentage of investment homes was achieved, as the investors’ share of the residential real estate market fell from 25% to 13%. This translated into a loss of 10,000 home sales annually, of which 4,000 would have been purchases of new apartments, reflecting a hefty 10% of the construction industry’s annual sales. This sales decline made it challenging for the developers to advance their new projects, as banks only provide construction financing after 15% of the project has been sold. Another effect was indirect but significant: Investors often buy existing homes, and their absence from the second-hand market due to the increased tax forced many apartment owners to retain their homes and not upgrade to larger homes, putting a damper on the construction industry. Now that the purchase tax is lower, the expected sales increase should reinvigorate the industry.
Another positive effect of the new tax break is the benefit to the rental market, in which demand greatly outstrips supply. By increasing real estate investments, the supply of rental units will increase, causing rents to decrease.
Bottom line: We are jumping for joy that our clients have finally caught a tax break.
Gedaliah Borvick is the founder of My Israel Home (www.myisraelhome.com), a real estate agency focused on helping people from abroad buy and sell homes in Israel. To sign up for his monthly market updates, contact him at [email protected].
