Couple Loses Tax Appeal on 'Shell Apartment' Purchase

A couple's attempt to save approximately $72,000 (NIS 267,000) in purchase tax by classifying their new apartment as a 'shell apartment' has failed, with a court ruling it a residential unit. The couple purchased the property in Ramat Hasharon in December 2022 for about $2.5 million (NIS 9.45 million). They argued it was a shell apartment, requiring a 6% purchase tax, totaling around $150,000 (NIS 567,000). However, the tax authorities assessed it as an additional residential property, calculating the tax at approximately $220,000 (NIS 834,000), a difference of about $72,000.

The couple presented evidence of missing components for full habitation. Yet, city inspector photographs revealed a nearly completed unit with a kitchen island and faucet, tiled bathrooms with toilets and showers, parquet flooring, electricity, water, air conditioning, windows, shutters, interior doors, and a clear room division. The building had already received its occupancy permit (Form 5), and the couple moved in less than a year after purchase.

The District Court's Appeals Committee ruled that the property was indeed a residential unit, upholding the higher tax assessment. The couple was also ordered to pay $10,700 (NIS 40,000) in legal costs. The court's decision was based on the actual condition of the apartment, not just its contractual classification.

This ruling occurred before explicit legislative changes clarified the definition of shell apartments for tax purposes. Since January 2024, Israeli tax law explicitly defines shell apartments intended for residence as residential units for purchase tax calculations, even if external walls are incomplete and the seller commits to finishing them. This change aims to close tax loopholes, particularly for investors buying additional properties, who now face higher tax rates (8% and 10%) compared to the previous 6% rate for non-residential properties.

While this classification can be disadvantageous for those buying additional homes, it can benefit first-time buyers by allowing them to utilize lower tax brackets, including an exemption on the initial portion up to approximately $525,000 (NIS 1.98 million). The court's emphasis remains on the physical state of the property and the buyer's intentions, rather than solely the contract's label.