Tax Trap: Future Building Rights Counted in Current Land Sale Value

A land deal in Acre, Israel, has highlighted a tax "trap" where potential future earnings from unapproved construction plans are being factored into the current taxable value of a land sale, potentially costing sellers and buyers millions of shekels. The case involves a 6.2-dunam plot sold in early 2022 by S. Me'esholim Acre to Shagrawi Initiative and Construction for 39 million shekels. At the time, the land had approved rights for 130 apartments.

However, the contract included a clause stipulating that the buyer would pay an additional 193,550 shekels for each apartment built beyond the initial 130. The seller was already advancing a plan to increase the number of apartments to 192, which, based on the contract's terms, represented an additional potential payment of over 12 million shekels. Israel's Tax Authority considered this future payment as part of the land's true economic value, assessing the total transaction value at over 51 million shekels.

This significantly impacts both parties. For the buyer, it increases the purchase tax, which is typically 6% of the transaction value, by approximately 720,000 shekels. For the seller, the capital gains tax is calculated on the profit, and including the future payment inflates this profit, potentially leading to a much higher tax liability than anticipated based on the immediate payment received.

The companies argued that the future payment was separate and contingent on planning approvals. However, the Haifa Appeals Committee ruled that because the payment was directly tied to the number of additional apartments and the seller had already begun advancing the planning, it was intrinsically linked to the land's value. The appeal was dismissed, and the companies were ordered to pay 40,000 shekels in legal costs.

Ironically, the final plan approved even more apartments than the Tax Authority had estimated. The committee noted that the tax assessment could be adjusted if the final number of apartments differs, but a four-year statute of limitations for tax assessment adjustments might not be sufficient for lengthy planning processes. S. Me'esholim Acre has appealed the decision to the Supreme Court, leaving the final outcome pending.