As a real estate broker in Emek Jezreel, "Lior Zehavi Emek Real Estate", I meet quite a few people who are dealing with capital gains tax for the first time when they sell a property. It is a tax that can seem daunting, but with a little knowledge and proper planning, it can be significantly reduced - and most importantly, legally.
So what exactly is a appreciation tax? Let's understand the basics and delve into ways to reduce it.
What is a tax of appreciation?
Capital gains tax is a tax levied by the state on the profit from the sale of real estate. How is this profit calculated? You take the selling price of the property, subtract the purchase price, add certain adjustments (such as inflation), and deduct expenses invested in the property over the years.
For example, if you bought an apartment for 1 million NIS and sold it for 1.5 million NIS, your profit is 500,000 NIS (before adjustments and expenses). You will pay capital gains tax on this profit.
How can I reduce the gratuity tax?
There are several legal ways to reduce the capital gains tax, and here are the most important ones:
Taking advantage of exemptions and reliefs
There are cases in which you can receive a full or partial exemption from capital gains tax. For example:
– If this is your only residential apartment, you may be eligible for tax exemption, subject to meeting the conditions (see below for details on the conditions).
– If you purchased the property before January 1, 2014, there is a linear tax calculation mechanism, which significantly reduces the tax paid.
Recognition of expenses
If you invested in renovations, paid brokerage fees, worked with a lawyer, or paid purchase tax, these expenses may be considered a recognized expense and reduce your tax liability. Keep all receipts and invoices!
Advance tax planning
Proper planning begins before the sale. If you are considering selling a property, it is worth considering how to plan for tax liability, whether through an appropriate ownership structure (individual or corporate) or by timing the sale in a way that will optimize taxation.
Using linear calculation
For properties purchased before 2014 and sold afterwards, it is possible to use the linear calculation mechanism that reduces the tax on a portion of the profit accumulated in previous years.
Professional advice
Not all of us are tax experts, and that's okay. This is where accountants and real estate lawyers come in, who are familiar with all the laws, regulations, and exemptions.
The conditions for exemption from capital gains tax for a single residential apartment
To receive an exemption from capital gains tax for a single residential apartment, the following conditions must be met:
1. A residential apartment qualifies:
– This is an apartment that is actually used for residence or was used for residence for 80% of the period for which the profit is calculated.
– The apartment must be built and not at the skeleton stage or a future project.
2. Single apartment:
– The seller must own only one apartment in Israel (or in the territories of Judea and Samaria).
– If he owns small parts of another property (up to 1/3 of the property), he can still be considered to own a “single apartment.”
3. Period of ownership of the apartment:
– The seller must have owned the apartment for at least *18 months* since it became his only apartment.
– If you purchased the apartment before January 1, 2014, specific adjustments are required in accordance with the law.
4. Sales Limit:
– The exemption is granted to the seller who has not sold another apartment exempt from capital gains tax in the 18 months preceding the current sale.
5. The seller is a private individual:
– The exemption is only relevant to individuals and not to corporations, companies or business entities.
If not all conditions are met, it is sometimes possible to receive a *partial exemption*, in which a reduced capital gains tax is calculated for part of the period in which the apartment was used as a single residential apartment.
How do you deal with a tax on appreciation?
So let's say you're selling a property - what do you do?
1. Check if there is any tax liability at all. Sometimes there is no tax liability at all, for example if you are eligible for an exemption.
2. We perform an initial calculation and prepare all the documents.
3. Submit a report to the Tax Authority within 30 days of the date of sale.
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In conclusion
Capital gains tax can seem like a heavy burden, but there are many ways to legally reduce it. With a basic understanding of the laws and proper planning, you can save thousands, even tens of thousands of shekels.
If you are about to sell a property, I recommend consulting with a tax professional or simply contacting me – I am here to help you do it right.
Lior Zahavi,
Real Estate Valley
