Purchase Tax on Additional Homes Likely to Remain High in Israel

Israel's purchase tax on additional residential properties is set to remain at its current rates of 8% to 10% into early 2027, due to a legislative technicality involving election timing. The current tax structure, slated to expire at the end of 2026, will likely be extended into the first few months of 2027 because of a law that automatically extends 'sunset clauses' around election periods. Following this extension, a new government and Knesset will need to decide whether to maintain the higher rates or revert to lower rates, which previously started at 5%.

Real estate developers are lobbying for a reduction in the purchase tax, citing a large inventory of unsold new homes and weak sales. They argue that lower taxes would attract investors, thereby boosting demand. However, the Ministry of Finance maintains that the higher tax is a crucial tool for housing policy, aimed at prioritizing first-time homebuyers and young couples struggling with high property prices and the substantial down payments required.

The rationale behind the elevated tax is that housing serves a dual purpose as both an investment and a basic necessity. A higher tax on investment properties makes them less attractive to speculators, theoretically freeing up more housing stock for individuals and families seeking a primary residence. Historical data from 2015 and 2021 shows that increases in the purchase tax led to a temporary surge in investor activity before the change, followed by a significant drop in their purchases.

While some argue that reducing the investor presence could decrease the rental supply and drive up rent prices, the prevailing view within the Ministry of Finance, supported by the Tax Authority, is that the benefits of keeping the tax high for potential homebuyers outweigh this concern. Professionals in the finance ministry see the tax primarily as a housing policy instrument rather than a revenue-generating tool. The current administrative setup and the need for comprehensive legislation in a new government are expected to favor the continuation of the existing tax policy at the start of 2027, with a definitive decision to follow later.

The financial impact on investors is noted to be relatively small in terms of annual yield, even with the 8% tax. For a 3 million shekel apartment rented at 8,500 shekels per month, the gross yield on cost with the 8% tax is around 3.15%, compared to approximately 3.35% for a primary residence buyer paying a lower tax. This suggests the tax's main effect is on the initial cost and investor psychology, rather than drastically altering the property's ongoing economics.