Introduction
The sale or disposition of a real estate asset located in Israel, as well as any income produced by such real estate (e.g., rental income), is considered Israeli source income. This aligns with the general principle that income derived from real estate is sourced in the country where the property is located.
The taxation of real estate in Israel is primarily governed by the Land Appreciation Tax Law (Appreciation and Purchase) 5723/1963. However, entrepreneurial or business profits earned in relation to real estate are taxed in accordance with the Income Tax Ordinance (New Version) 5721/1961.
According to the Land Appreciation Tax Law, the term “real estate” includes rights in a “real estate association,” which refers to any entity that owns (directly or indirectly) mainly real estate located in Israel.
This article summarizes the main factors to consider when contemplating real estate-related investments in Israel.
Purchase Tax
The purchase of real estate rights located in Israel is subject to purchase tax. The purchase tax rate depends on the nature of the purchased asset. The term ‘real estate right’ is defined broadly to include ownership rights, lease rights for a period exceeding 25 years and certain use rights for a period exceeding 25 years.
The purchase of any real estate rights (other than rights in residential property) is subject to a 6% purchase tax. The same rate applies to the purchase or issuance of shares in a real estate association. The tax is calculated based on the fair market value of the proportionate share of the underlying real estate reflected by the purchased shares.
The purchase tax rates applicable to residential property are updated from time to time. The rates depend on the value of the purchased asset and whether the purchaser owns more than one residential property in Israel. Newcomers and returning residents may benefit from reduced rates.
Single residence asset[1] | Multi residence asset | ||
Value of asset (NIS) | rate | Value of asset | rate |
Up to 1,978,745 | 0% | Up to 6,055,070 | 8% |
1,978,745 – 2,347,040 | 3.5% | Above 6,055,070 | 10% |
2,347,040 – 6,055,070 | 5% | ||
6,055,070 – 20,183,565 | 8% | ||
Above 20,183,565 | 10% | ||