Israeli Interministerial Team Delays Real Estate Betterment Tax Reform, Developers Disappointed
After three years of study, an interministerial team including the Ministries of Justice, Finance, and Interior has postponed a major reform of Israel's betterment tax, a key issue in the real estate market. The interim report, spanning 95 pages, refrains from endorsing a single deep reform and instead recommends further examination of four main alternatives: setting uniform rates, abolishing the tax in favor of capital gains tax, replacing it with a sales tax, or imposing a one-time sales tax on new properties.
The betterment tax is levied on property owners when a zoning plan approval increases their property's value, typically paid upon sale or exercising new rights. The current system causes significant uncertainty and disputes due to the gap between the tax event (plan approval) and the payment event (sale or rights use), sometimes decades apart. This uncertainty affects project feasibility and deters developers from investing.
The team highlighted the structural uncertainty as a strategic problem delaying real estate development. While no preferred alternative was selected, the report suggests short-term measures such as postponing tax liability to the building permit stage in certain cases, legislating that master plans not trigger tax events, setting mandatory appraisal timelines, and establishing a combined legal-appraisal forum to issue periodic opinions. It also recommends adopting appraisal methods aligned with recent court rulings to ease disputes in urban renewal projects.
Industry reactions were critical. The Deputy President of the Builders Association, Haim Feiglin, called the report a "major disappointment," emphasizing the tax's impact on housing costs and noting its outdated origins. Lawyers warned that proposed delays in tax calculation could lead to higher taxes and increased housing prices, and cautioned that without enforcement sanctions, proposed deadlines would be ineffective. They also raised concerns about potential hidden tax liabilities if master plans do not trigger immediate tax events.
The Ministries of Justice and Finance focus on short-term fixes, but developers and legal experts remain dissatisfied, urging more decisive reform to resolve the longstanding issues affecting Israel's real estate market.
