Israel Collects Billions Annually from Real Estate Transactions

Israel's state coffers are set to receive approximately 22.3 billion shekels in 2026 from real estate-related taxes and land sales, representing about 2.6% of the total projected budget. This revenue is generated through three main channels: purchase tax, capital gains tax on property sales, and income from state-owned land. The largest portion, 7.5 billion shekels, comes from purchase tax, followed by 6.83 billion from capital gains tax, 6.81 billion from "capital income" (primarily land sales), and 1.2 billion from the Israel Land Authority. While this sum is modest compared to income tax or VAT, its volatility is significantly higher, making it a key indicator of budget execution fluctuations.

The "capital income" category, despite its name, is almost entirely derived from the sale of state land, with no significant revenue expected from the sale of government companies or banks in 2026. Purchase tax rates, which were frozen until January 2028, feature a progressive structure where the first 1.98 million shekels of a primary residence's value are tax-exempt. However, purchasing a second property immediately incurs an 8% tax on the first shekel, creating a substantial difference in tax burden. For instance, a 2.5 million shekel property incurs only 744 shekels in purchase tax for a first-time buyer, but 160,000 shekels for a second-home buyer.

Capital gains tax is levied at 25% on the real profit after inflation and deducting expenses. However, the effective rate is often lower due to a significant exemption for selling a sole residence owned for at least 18 months, applicable up to a value of approximately 5 million shekels. The article highlights that the majority of capital gains tax revenue does not come from residential property sales but from non-agricultural land and commercial buildings. In 2023, only 1.06 billion shekels were collected from private residential property sales, compared to 2.9 billion from non-agricultural land and 2 billion from commercial buildings.

Historical data reveals significant discrepancies between planned and actual tax collection for both purchase and capital gains taxes, with actual collections often deviating substantially from forecasts, especially during market booms and downturns. The revenue from state land sales is also highly volatile, fluctuating dramatically year to year. In contrast, income from the Israel Land Authority has shown relative stability and consistent growth above projections.

For homebuyers, purchase tax represents a significant one-time expense, particularly for those buying a second property, where the tax can reach hundreds of thousands of shekels. The current tax structure, with its frozen brackets, means that rising property prices can push more of a property's value into higher taxable tiers, even without changes in the law. Sellers benefit from exemptions on their primary residence up to a high threshold, but those selling multiple properties face the full capital gains tax.