Israeli Tax Authority Wins Case on Property Tax for Unfinished Homes

An Israeli appeals committee has ruled that the purchase of an unfinished house, where the seller is obligated to complete construction, is subject to property purchase tax rates applicable to completed residential properties. The ruling came in a case involving two brothers and their partners who bought rights to a duplex under construction. They argued that since the property was not yet a finished residence, it should be taxed at a lower rate of 5%. However, the Hadera District Real Estate Appraiser classified the properties as residences and applied the higher tax brackets for non-primary residences.

The buyers, David and Einat Sharvit, and Avraham and his partner, purchased the rights from sellers Roni Biton and Yuval Aaron. The original sellers had obtained permits to demolish an old house and build a new duplex, entering into construction contracts worth approximately NIS 4 million. The buyers effectively stepped into the sellers' shoes, assuming existing construction debts and future obligations to complete the work. The agreed-upon price for each property was NIS 5.5 million, with the buyers also taking on construction debts totaling NIS 1 million per property and a similar amount for future work.

The appeals committee, headed by Judge Heri Kirsh, unanimously rejected the appeal. The core of the legal dispute centered on the definition of a "residential dwelling" in the Land Tax Law, which includes unfinished homes if the seller commits to completing construction. The buyers claimed they purchased a shell without full seller responsibility, thus falling outside the definition. The tax authority countered that the transaction included an enforceable commitment to complete construction, making it a "paper apartment" in substance.

Judge Kirsh reviewed previous rulings, establishing that the key factor is whether the seller transferred a package of rights that included a commitment to completion. If the buyer is not required to arrange a new contractor and contract but rather assumes an existing deal, the transaction is considered a residential dwelling. The committee noted that the majority of the funds, about NIS 14.5 million, went to the individual sellers, with only about NIS 500,000 to the contracting companies, reinforcing the view that the buyers acquired a complete package, not just land and a shell.

The committee dismissed the appeal regarding the classification as a residential dwelling, though it refrained from awarding costs on the complex issue of defining the seller's commitment. The conclusion for buyers is clear: entering an existing construction deal and acquiring rights with a commitment to completion means facing property purchase tax as if buying a finished residence, even if only a shell exists at the time of signing.