Israeli Capital Gains Tax – Tax Liability Reduction / Ohad Shpak
The Israeli capital gains tax is a state tax on profit arise from the sale of “land rights”. The tax applies to the seller. When expenses increase, the profit is reduced, meaning that capital gains tax liability is lower.
Israeli capital gains tax is a tax on capital gain accumulated by the seller when he carries out a real estate transaction. In general, it can be said that the profit (the betterment) generated on behalf of the seller, is the difference between the price paid at the time of purchase of the property and the consideration received from the sale of the property.
The purpose of the Israeli Land Taxation Law (Betterment and Purchase), is to impose tax only on the profit generated to the seller as a result of the sale. When there is no profit, the law does not impose a tax charge.
Since the tax is imposed only on the “betterment” resulting from the sale, the law sets out instructions on how betterment is to be calculated. Determination that betterment is the difference between the purchase price and the selling price is general only, since the components on each side of the equation – the side of the purchase vis-à-vis the selling side – must be defined. Only after we know how to calculate the value of the sale and the value of the acquisition, can we compare them and examine whether profit / betterment has been created for the seller, and what it is.
The kinds of components defined by law to determine the amount of betterment are various.
To reduce capital gains tax liability, the Israeli law permits adding expenses incurred by the seller to improve the land to the value of the purchase – such as renovations, payment to lawyer, real estate broker fee, etc.
The following are some important rules regarding the possibility of deducting expenses incurred by a seller:
A) Expenses intended to increase the value of the property. As a rule, these are expenses intended to raise the value of the property and are not expenses for maintaining the existing property (i.e., for the ongoing maintenance of the property).
B) Connection between expense and goal – the person claiming the expense must prove the connection between the expenditure itself and the property betterment; in other words, that the purpose of the expense was to bring about an increase in the value of the property, and thus there is no need to prove that the expenditure actually increased the value of the property.
C) Reasonable expenditure – In the context of proving the connection between expenditure and property improvement, the expenditures have to be reasonable and logical.
D) Self-employment – The seller’s self-employment may also be included as an improvement to the house / apartment.
Therefore, to reduce capital gains tax liability, it is recommended to keep records of expenses, such as receipts or invoices that include all seller and property details, or copies of checks paid.