Purchase tax is back to 8%

The first purchase tax bracket imposed on buyers of investment apartments in Israel was reduced in July 2020, during the days of Finance Minister Israel Katz, to 5%; Now the tax is expected to go up.

According to the bill, the purchase tax for investors will increase from 5% to 8%, probably as early as next week. The purchase tax brackets will change and be reduced from 5 steps to only two. From now on, every buyer of an apartment that is not his only apartment will pay a tax of 8% of the first shekel up to a value of NIS 5,348,565 million. For each part that exceeds this value, the buyer will pay a tax of 10%. The amounts that define the tax brackets are updated once a year on the basis of the housing price index.

Following the tax reduction in July 2020 initiated by Israel Katz, there has been an increase in the number of apartment purchase transactions made by investors in the past year. According to a recent survey by the Chief Economist at the Ministry of Finance, in July 2021 investors bought 2,600 apartments out of 13,800, 3 times more than in July 2020, an increase of 80% compared to July 2019. In June 2021 investors bought 2,900 apartments. In July this year, the proportion of investors in all transactions for the purchase of an apartment was 20%.

In fact, this is a return to the previous tax amount: this is the same tax increase model used by Finance Minister Kahlon in 2015. The purchase tax remained so until July 2020, when former Finance Minister Israel Katz decided to reduce it to 5% (with bracket steps of 6%, 7%, 8%, and 10%) to help the housing market deal with the corona crisis that befell it.

It should be noted that purchase of a first or an only apartment grants an exemption from purchase tax on the part of the value up to NIS 1.74 million. The first tax bracket is 3.5% for the value portion of NIS 1.74 million and another NIS 2.07 million, the next bracket is 5%, 8%, and 10% for luxury apartments. These tax brackets will not change this year.

Will it stop investors from buying apartments for investment? Of course not. Investing in Israeli real estate is still one of the safest investments, and a 3% tax difference does not make the real estate sector less attractive.

What difference does it make to my annual yield?

Let’s imagine the following situation and ignore some expenses:
Property price – 1,000,000 nis
Significant fees – 30k (agent and lawyer fees)
Current purchase tax – 5% (50,000 nis)
Monthly rent income – 3,000 nis
Annual yield from the rent – 3.333%

Property price – 1,000,000 nis
Significant fees – 30k (agent and lawyer fees)
New purchase tax – 8% (80,000 nis)
Monthly rent income – 3,000 nis
New annual yield – 3.272%

Difference ~0.06%

As you can see, an increase in purchase tax affects your initial investment sum, but it does not affect significantly your annual yield.

Does the new purchase tax affect everyone?

The new purchase tax is imposed on investors and foreign buyers. If you are a resident of Israel (or about to make an Aliyah) then your tax brackets work differently, granting you a full exemption on the part up to 1.74m nis.

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