International taxation - Additional Exemptions Introduced for Selling Residential Apartments and New Purchase Tax Rates

Due to a shortage of residential apartments as well as the increase in real estate prices, the government has decided to take some measures aimed to increase the supply of residential apartments for short term. Accordingly, real estate Taxation Act (increasing the supply of Residential Apartments – Temporary Order) 2011, (hereinafter: “Temporary Order“), was published. Below is a review of the scope of the legislation:

Land Betterment tax exemption– according to pre-existing law, gain arising from the sale of a “qualifying residential apartment” (as defined in the law) sold once every 4 years, is exempt from land betterment tax (at the request of the tax payer). Based on the temporary order, gain from selling a “qualifying residential apartment” from January 1^st 2011 until December 31^st, 2012, will be exempt, at the request of the tax payer. The latter exemption is granted in addition and notwithstanding the general exemption as aforementioned.

Within the Temporary Order, several limitations and conditions were set as follows:

• Selling 2 apartments at most, within the exemption of the temporary order

• The sold apartment was not transferred to the seller without consideration, during the period of November 1^st 2010 until December 31^st 2012.

Note: according to the phrasing of the temporary order it seems that this restriction may apply on apartments received through inheritance.

• The sale of the apartment is not to a family member or an affiliate entity.

• The sale value will not exceed 2.2 million NISper apartment. (In case the sale value exceeds 2.2 million NIS, a partial exemption will apply).

  Based on the foregoing, a person who did not generate an exempt gain from the sale of a qualifying apartment during the preceding 4 years, may sell up to 3 apartments from 1.1.2011 until 31.12.2012.  The gain arising from the sale of 2 apartments may be exempt based on the temporary order, subject to its restrictions. The gain from the 3^rd apartment may be exempt based on the general pre-existing law without such restrictions.

  Increase of purchase tax– in order to discourage the purchase of residential apartments for investments purpose and, as a result, reduce the demand thereof, the temporary order has increased the purchase tax progressive rates for individuals purchasing an apartment which is not their sole apartment as follows (prior to this, the purchase tax rates in this case were progressive: 3.5% and 5%):

• Up to 1 millionNIS- 5%

• Between 1 millionNIS to 3 millionNIS- 6%

• 3 millionNISand more- 7%

  Note: The increased tax rates will apply as of November 16 and until December 31^st 2012.