Israeli Investors Exploit 'Fractional Ownership' Loophole to Reduce Property Taxes
Israeli real estate investors are increasingly exploring a legal strategy involving 'fractional ownership' to circumvent high property taxes on additional homes, which range from 8% to 10%. This method hinges on holding up to one-third of a residential property's ownership rights, a threshold defined in law as a 'fraction of an apartment.' The aim is to spread investments across multiple properties while staying below tax thresholds.
However, experts warn that this strategy is fraught with misconceptions, commercial complexities, and legal pitfalls. A common error is believing that owning a full apartment and then purchasing a third of another allows for reduced tax rates as a 'single home' owner. In reality, the order of acquisition is crucial. Tax authorities view owning up to one-third of a property as holding no property at all, enabling reduced taxes on a subsequent first full apartment purchase. Conversely, buying a fraction of a property after already owning a full one does not grant this benefit, and the fractional purchase will be taxed at the higher rates for additional properties.
While the law allows for acquiring multiple fractions of different properties to repeatedly benefit from lower tax brackets before purchasing a full apartment, this can lead to complex ownership structures. Investors may find themselves with numerous partners in 'unspecified co-ownership,' where physical division of the property is absent. This can create difficulties in managing the property, potential disputes among co-owners, and complications if external financing or mortgages are involved.
Commercial considerations often outweigh tax advantages. Factors such as the inflexibility of purchasing with partners, the risk of disagreements, and the desire to preserve eligibility for future government housing lotteries can deter investors. The Israel Tax Authority generally adheres to the explicit wording of the law but could intervene with legislative changes if the practice becomes widespread and disruptive.
Specific scenarios where the strategy fails include owning multiple apartment fractions within the same building, which could lead tax authorities to aggregate the holdings and disqualify tax benefits. Additionally, if the entire arrangement is deemed artificial and solely for tax purposes without economic logic, tax authorities may challenge it. Splitting purchases among immediate family members, such as spouses and minor children, is also generally not recognized for tax benefits due to the 'family unit' principle, though it may apply to adult children or other relatives.
Inheritance also presents a significant risk. While selling an inherited apartment may be exempt from capital gains tax if it was the deceased's sole residence, this exemption is lost if the deceased owned even a small fraction of another property. This oversight can result in substantial, unexpected tax liabilities for heirs, underscoring the need for careful estate planning.
