Purchase Tax Hike on Israeli Real Estate Investors | Barnea Jaffa Lande & Co.
Last week, the Israeli Ministry of Finance approved the draft to again increase the purchase tax for real estate investors to 8% and 10%. The aim of the ministry is to “dissuade” investors from buying investment apartments and to reduce demand on the housing market.
The government has turned the tax hike into accelerated legislation with a minimal timeframe for public comment to prevent investors from rushing to buy homes before the rules go into effect.
As you may recall, the then Finance Minister Moshe Kahlon decided at the end of June 2015 to raise the acquisition tax for real estate investors to 8% and 10% respectively, on the grounds that this would “deter” investors. As a result of the COVID-19 crisis, then Finance Minister Israel Katz lowered the investor tax to its previous rates (i.e. on tax brackets from 5%) in July 2020.
According to the new bill, which is similar to Kahlon’s strategy from 2015, the purchase tax for a second apartment is 8% from the first shekel up to a purchase price of 5,348,565 ILS. If an apartment costs more than ILS 5,348,565, the tax on the portion in excess of the aforementioned purchase price is 10%.
The Treasury Department’s Economic Department recently published a residential property appraisal. It shows that investors bought around 2.6 thousand apartments in July 2021, three times more than the lowest level in July 2020 and 80% more than in July 2019. It is obvious that the rise in property prices since last year is mainly due to “To blame” for lowering purchase tax rates for real estate investors.
The ministry’s report also shows, however, that investors not only exhaust apartments, they also sell apartments. As a result, the bottom line is that investors’ housing stock hasn’t changed much, so they may not be the main cause of soaring home prices.
Experience has taught us that reducing investor activity in the real estate market by increasing the acquisition tax on investment apartments does not lead to a reduction in house prices, which contrary to forecasts continued to rise after the tax hike in 2015.
In addition, there was also a shortage of rental apartments between 2015 and 2020. Since the supply of rental apartments on the market is already low, the purchase tax increase caused rents to rise significantly. Most affected by this approach are those who do not have the financial resources to raise the seed capital to buy a home and therefore rely on the rental housing market. For investors who have the financial means to buy a second home, however, the tax increase will not play a significant role in their decision, as these investors ultimately pass on their additional costs to their tenants.
The benefit of reintroducing the purchase tax increase imposed on property investors will be immeasurably less than the disadvantages suffered by the treasuries, property market, and apartment renters in Israel in repeated attempts to drive investors out of the local market.
Foreign and local real estate investors are an extremely important part of the housing market in Israel. You are a positive factor in a robust and dynamic real estate market. They are pumping billions into the state coffers and increasing the supply of rental apartments, which in turn dampens the upward trend in rents. It would have been desirable if the Treasury Department had given due consideration to these factors before deciding to raise the tax rate again.