Multi Home Tax

Also known as “tax on the third home and up,” this controversial new tax was effective from January 1, 2017. It was included in the “Economic Efficiency Law” for budgetary years 2017-18.

The aim is to discourage the rich from buying up homes and pushing up prices. Reports suggest that home prices may have doubled since the 2008 economic crisis.

Main Provisions:

The new law says that a “Taxable Person” will pay the multi home tax on each home owned by that person each year, excluding the first two homes owned, according to the taxpayer’s choosing.

A “Taxable Person” is an individual who owns a number of homes whose total percentage ownership is 249% or greater. In other words, those who own 2.49 homes or more.

A home means a finished home in Israel intended for residential use, according to its type or its planning permission.

Someone who owns two residential apartments 100% with a 50% stake in a third apartment, will become liable to this tax. But someone who inherits together with his two siblings, a 33% share in seven different apartments, will not be liable to this tax. And someone who puts all his money into one or two luxury homes in an exclusive neighborhood will not be liable to the tax. Changes to ownership taking place during the tax year are pro-rated according to the number of days.

For purposes of this tax, an owner includes the taxpayer’s spouse unless they are permanently separated, kids under 18 together with properties owned by a Closely Held Entity of which the taxpayer is a member.

How much is the tax?

The tax is 1% of the “prescribed amount.” The prescribed amount is based on a formula dependent on the property’s estimated value and location. There is a ceiling however, upon each dwelling of NIS 18,000 in tax per year.

There is also a complete exemption applicable if the sum of the prescribed amount of all “investment homes” which are the properties, other than the most expensive property, is less than NIS 1,150,000. A partial exemption, based on another formula, is given when the aforementioned sum is between NIS 1,150,000 and NIS 1,400,000.

More examples:

Suppose someone has three residential apartments with prescribed amounts as follows: Apartment A – NIS 3,000,000; Apartment B – NIS 2,000,000 and Apartment – NIS 1,000,000. Apartment A as the most expensive, would be chosen as the primary property and therefore treated as exempt from the tax. Apartments B and C are then considered to be the “investment homes.” Apartment B as the second most expensive home would be treated as exempt. Apartment C, with the lowest prescribed amount is subject to the multi home tax of 1% of NIS 1,000,000 = NIS 10,000.

If, on the other hand, the prescribed amounts are: Apartment A – NIS 3,000,000, Apartment B – NIS 625,000 and Apartment C – NIS 500,000, the sum of the “investment homes” is 1,125,000. In this scenario, A, B and C would all be exempt.

Sale grants:

To encourage home sales in the coming months, regulations provide that taxable persons who sell homes between January 1, 2017, and October 1, 2017, may apply to receive a “grant” that amounts to a refund of land appreciation tax paid on the sale, but no more than NIS 85,000 if the taxable person does not qualify for the up-to-NIS 1,150,000 exemption.

If an exemption does apply, the grant may be 50% of the land appreciation tax (but no more than NIS 15,000).

Various conditions apply to this grant, in particular an undertaking not to buy another home before the end of 2020, and if there was a home purchase since December 16, 2016, the present sale is to an Israeli resident who is upgrading his accommodation or has no home, and the present sale is not to a relative or for no consideration.

Exceptions:

The tax may not apply to homes in various cases including: homes owned by registered Israeli charities; entitled to certain tax benefits (approved properties, approved rental buildings); long term rental homes pursuant to a state tender; rented to protected tenants; considered inventory; part of a land estate (Nachala); inherited properties for one year after the date of death of the testator, if not rented out then; inherited by orphans under age 18 who have lost both parents.

Homes that have been legally subdivided, or joined, are considered to be one property.

Enforcement:

The Tax Authority will be sending assessment notices to likely taxable persons, followed by penalty demands.

Comments:

The new law was rushed through the Knesset. Questions have arisen as to whether the new law was properly debated. It remains to be seen whether there will be a judicial review and/or an amendment.

Critics say the government should release more land for home construction. Also, there may soon be less rental apartments available leading to an increase in rental prices. Furthermore, the prescribed amount formula is complex.

Moreover, the new tax applies mainly to individuals, rather than companies who own multiple investment properties.

As always, consult experienced tax advisers in each country at an early stage in specific cases.

hcat@hcat.co

The writers are tax specialists at Harris Consulting & Tax Ltd.