Israel Tax Authority Rules Shell Properties Under Construction Are Taxable as Completed Homes
Translated & summarized from Mako by baba
An Israeli appeals committee ruled that unfinished properties with seller commitments to complete construction are subject to purchase tax as completed homes. Two brothers and their partners appealed a higher tax assessment on a duplex under construction, arguing it was a shell property. The committee upheld the tax authority's classification, stating that assuming the seller's existing construction contract makes it a residential unit. The buyers will pay the higher tax rate.
The story in 6 lines · by baba
- Israeli appeals committee ruled unfinished properties with seller completion commitments are taxed as completed homes.
- Buyers argued a duplex under construction should have a lower 5% purchase tax rate.
- The tax authority classified the property as a residential home with higher tax rates.
- The committee found buyers assuming seller's existing construction contract means it's a residential unit.
- The buyers' appeal was unanimously rejected by the committee.
- The ruling means buyers in similar situations will face higher purchase tax.
An Israeli appeals committee has ruled that properties still under construction, where the seller is obligated to complete the building, are to be taxed as completed residential units. The decision came after two brothers and their partners purchased rights to a duplex house that was in the early stages of construction. They argued that since the property was not yet a finished residence, it should be subject to a lower purchase tax rate of 5%.
The tax authority in Hadera classified the properties as residential homes and applied the higher tax rates applicable to non-primary residences. The buyers appealed this classification, but the Appeals Committee, headed by Judge Heri Kirsh, unanimously rejected their appeal, with each party bearing their own legal costs.
The original sellers, Roni Biton and Yuval Aaron, had obtained permits to demolish an old house and build a new duplex. They contracted with construction companies for approximately NIS 4 million to build the homes. Subsequently, they sold their rights to David and Einat Sharvit, and Avraham and his partner. The sale contracts stipulated a price of NIS 5.5 million per property, with the buyers assuming the sellers' obligations, including existing construction debts and future completion costs.
The core of the legal dispute centered on the definition of a "residential home" in the Land Taxation Law, specifically the clause regarding the seller's commitment to complete construction. The buyers contended they bought a shell without a full seller's guarantee for completion, thus falling outside the definition. The tax authority countered that the transaction included an enforceable commitment to finish the building, making it a "paper apartment" in essence.
Judge Kirsh reviewed previous rulings, establishing that if a buyer is not required to arrange for a new contractor and contract but instead steps into the seller's existing agreement, the transaction is fundamentally a residential home purchase. The committee noted that the majority of the funds, approximately NIS 14.5 million, went to the individual sellers, with only about NIS 0.5 million to the construction companies, reinforcing the view that the buyers acquired a complete package, not just land and a shell. The committee avoided ruling on costs related to the calculation of the sale value, but the classification issue was decided against the buyers.
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