Israel Imposes 25% Capital Gains Tax on Real Property Profits with Significant Exemptions

In Israel, capital gains tax on real estate profits is set at 25% of the real gain, which is the difference between the sale price and purchase price adjusted for inflation. The tax applies only to the profit exceeding the erosion of money value due to inflation, distinguishing it from rental income, which is taxed differently. The calculation starts with the sale price stated in the contract, from which recognized expenses are deducted. These include purchase-related costs such as purchase tax, legal fees, brokerage fees, and municipal payments, as well as improvement expenses like renovations and expansions supported by receipts. Real interest paid on mortgages under certain conditions can also reduce the taxable gain.

A key exemption is the single residential property exemption, which applies to sales up to 5,008,000 shekels, provided the seller has owned and lived in the property for at least 18 months and it is their only registered residence at the time of sale. Partial ownership in additional properties or inherited properties affects eligibility and exemption limits. Properties received as gifts are subject to a statutory waiting period before sale to qualify for exemption. Transactions involving additional building rights are split between the residential value and the rights value, with exemptions applying only to the residential portion.

Properties purchased before 2014 benefit from a linear calculation method that exempts gains accrued before 2014, reducing the taxable amount. For example, a property bought in 2010 and sold in 2026 would have 75% of the gain taxable, saving the seller tens of thousands of shekels. Taxpayers can also spread the taxable gain over up to four years to utilize lower tax brackets, which is advantageous for retirees with low income.

Capital gains from residential property sales are included in the income base for the surtax if the sale price exceeds approximately 5.4 million shekels, potentially pushing sellers into higher tax brackets. Sellers who buy replacement properties face both capital gains tax and purchase tax, making timing and transaction sequencing important for tax planning. Residency status affects exemption eligibility and reporting requirements. Sellers must report the transaction to the Real Estate Tax Authority within 30 days of signing the sale contract, including a self-assessment of the tax due.