Israel's Tax Authority: Hidden Partner in Real Estate Investments

Real estate investors in Israel face a significant "hidden partner" in their ventures: the Tax Authority. Expert Vered Ulfiner, a tax attorney and CPA who previously headed a professional department at the Tax Authority, explains that proper tax planning is crucial to avoid unnecessary payments that can erode investment returns.

Ulfiner highlights that since 2014, government policy, driven by the Bank of Israel and the Ministry of Finance, has aimed to increase taxes on investment properties. The purchase tax on investment apartments currently stands at 8%, a rate Ulfiner deems disproportionately high and indicative of the state's desire to discourage individual real estate investors in favor of REITs and large investment groups. "The state does not want real estate investors," she stated.

When it comes to rental income, a tax exemption exists for monthly earnings up to NIS 5,654, with amounts exceeding this threshold subject to tax. Investors can choose between a flat 10% tax rate without deductions or a tailored exemption route, which, despite its bureaucratic demands, may reduce the tax burden in certain cases. Professional consultation is advised, especially for self-employed individuals or those with multiple properties.

The most substantial tax is the 25% capital gains tax (Mas Shevach) upon selling the property. Ulfiner emphasizes that properties purchased before January 2014 are exempt from this tax for the period up to that date, regardless of the number of properties owned. Planning is essential as the gains accumulate over time.

For investors holding multiple properties, Ulfiner outlines a tiered approach by the Tax Authority. Owning one to five apartments is considered passive investment. Between five and ten, the investor enters a "gray area" where the Tax Authority may investigate whether real estate is their primary business. Holding more than ten apartments is generally considered a business activity, prompting Ulfiner to advise clients to consider transferring assets to children or purchasing properties through companies.

Ulfiner also touches upon the complexities of fractional ownership, gifting properties, and inheritance, stressing the importance of understanding tax implications to maintain the status of a primary residence and avoid unexpected liabilities. She advises investors to prioritize their business strategy over tax considerations, ensuring that financial planning serves the investment's success.