Couple Loses Tax Appeal Over 'Shell Apartment' Claim After $1.5M Renovation

A couple's attempt to classify their newly purchased apartment as a "shell apartment" to receive a reduced property acquisition tax was rejected by the Central District Court's Appeals Committee. The couple, Aryeh and Efrat Tusia-Cohen, purchased a luxury apartment in Ramat Hasharon for approximately 9.5 million shekels (around $2.5 million USD). They argued that the apartment was not habitable upon purchase, requiring extensive renovations costing over 580,000 shekels (around $155,000 USD), and thus should be classified as a "building" eligible for a lower 6% acquisition tax rate.

The Israel Tax Authority disagreed, classifying it as a "residential apartment" and assessing the higher 8% and 10% tax rates applicable to non-primary residences. The couple's initial appeal was denied, leading them to the Appeals Committee. They claimed they had to rent another apartment for eight months while completing the necessary work, citing missing essential fixtures like connected toilets, tiling, interior doors, and a kitchen.

However, the Tax Authority presented evidence, including photos taken shortly after the sale, showing the apartment was already plastered, painted, had parquet flooring, aluminum windows, electric shutters, and a modern kitchen. The municipality had also issued a completion certificate (Form 5) and the previous owners were charged municipal property tax for residential use. The court, led by Judge Shmuel Bornstein, ruled that the apartment met both objective and subjective criteria for a residential unit, noting it was built according to a residential permit and had received all necessary completion forms.

Judge Bornstein stated that the apartment was "a residential apartment in every respect," citing its completion certificate, utility connections, and the presence of fixtures typically found in a home, such as electrical and communication accessories, a kitchen, and sanitary ware. He added that minor finishing work or renovations, even extensive ones, do not transform a residential apartment into a "shell" or "building" for tax purposes, calling such a reclassification "unreasonable" and contrary to the law's intent.

This ruling addresses a loophole that previously allowed significant tax savings. A 2022 Supreme Court decision in favor of businessman Shlomo Nehama, who successfully argued a similar case for a luxury penthouse, had prompted the Tax Authority to seek legislative changes. Consequently, the 2023-2024 Arrangements Law expanded the definition of "residential apartment" to include shell apartments intended for housing, effectively closing this tax loophole.