Committee proposes easing taxes and rules for Israeli REITs to expand rental housing

A joint committee of the Israel Tax Authority, the Budget Division and the Israel Securities Authority has submitted recommendations on REIT funds to Tax Authority director Shay Aharonovich. The package focuses on easing development constraints, giving REITs more flexibility in managing assets, and changing tax rules, with the goal of removing structural barriers that have held back institutional long term rental housing in Israel since REITs began operating in 2006.

The committee said Israeli REITs still face unusually strict limits compared with Western markets. Under current rules, they may develop only up to 5% of asset value, must usually buy completed properties at full market price including developer profit, and face higher taxes in some early sales. The panel said these restrictions, along with holding-structure limits and rules meant to prevent commercial real estate trading, have made it hard for the sector to grow.

Among the main recommendations, the committee proposed allowing REITs to sell up to one third of apartments in each project without losing the preferred tax rate, and up to one half in projects in peripheral areas. It also suggested examining a mechanism that would let REITs sell homes to continued landlords under conditions set in legislation while preserving the project’s tax status. The panel further recommended scrapping the current requirement that a property use at least 70% of its construction rights to qualify as income producing in the Galilee and the Negev, and extending the current tax deferral period for transferring real estate into a REIT in exchange for shares beyond five years.

The committee also wants to let REITs acquire companies through mergers and buy shares in indirect real estate associations through holding companies, not only directly. Even before the final report, two related amendments were already approved, one allowing REITs to hold land for construction worth up to 20% of total assets, plus other non-income-producing assets up to 5%, and another extending the construction period for long term rental projects by three additional years beyond the current five or seven years.