Court Rules Buyers Must Pay Higher Property Tax on Under-Construction Home

Two Israeli couples, David and Einat Sharvit and Avraham and Sarit Sharvit, will have to pay a full property acquisition tax on a semi-detached house they purchased in Caesarea during its construction phase. The Tel Aviv District Court, presided over by Judge Heri Kirsh, ruled that because the seller had a commitment to complete the construction, the buyers are liable for the higher tax rate.

The buyers believed they should pay 5% of the transaction value, amounting to NIS 650,000 in tax. However, the Tax Authority's position, which Judge Kirsh adopted, was that the tax should be calculated on a higher valuation, resulting in a tax of NIS 1.08 million. This leaves an additional tax burden of NIS 430,000 for the buyers.

The property was purchased from Yuval Aaron and Roni Biton, who had acquired the previous building in 2021. In 2022, they signed agreements with construction companies owned by their fathers to demolish the old house and build a new one for NIS 4 million. They then sold the lot to the Sharvit couples, who assumed the contracts with the construction companies, committing to pay them NIS 2 million per family.

The Land Tax Authority initially assessed the purchase value at NIS 6.5 million per family, later revising it to NIS 7.5 million per family due to the commitment to pay for future construction work. An appeals committee at the Haifa District Court refused to approve this increase, and the Tax Authority's appeal is pending before the Supreme Court. The current ruling is based on the lower valuation.

Judge Kirsh explained that a "residential dwelling" for tax purposes includes a dwelling that is intended for residence, and in cases where construction is not yet complete, it is still considered a residential dwelling unless there is no commitment from the seller to finish it. He noted that while a shell of a building is not considered a dwelling, purchasing an "on paper" apartment from a contractor is, as the contractor commits to completion.

In this specific case, Kirsh determined that the Sharvit couples purchased a "package" that included both the property rights and the commitment to complete construction. He reasoned that the transaction's essence was the purchase of residential apartments in an advanced construction stage, not an independent building project. His reasoning included the Sharvits stepping into the sellers' shoes with the construction companies, the advanced stage of construction, the close link between the sale and the construction, and the familial relationship between the sellers and the contractors.

Members of the appeals committee, CPAs Zvi Friedman and Micha Lazar, concurred with Judge Kirsh's decision. The Sharvits were represented by attorneys Hananel Barhum and Mordechai Cohen, and the Tax Authority by attorney David Ohana.