In our previous tax alert (No. 10), we have reviewed the Israeli government’s measures aimed to increase the supply of residential apartments/homes, as presented in the Real Estate Taxation Act (increasing the supply of residential apartments – Temporary order), 2011.

According to a Memorandum of a Bill proposal that was recently published, the entire tax exemption system for gains (land betterment) derived from the sale of residential apartments/homes located in Israel, is expected to change dramatically as of 1.1.2013.

Basically, the tax exemption for gain deriving from the sale of one residential apartment/home, at any given period of time, will remain (provided it was actually used as a dwelling place).

As for residential apartments acquired prior to the publication of the suggested law, the built-in gain will remain exempt from tax. Hence, the gain will be apportioned to “the exempted period” (date of purchase until the publication of the suggested law), with respect to the entire holding period. A taxable gain will be subject to a flat rate of 20%.

Another provision included within the memorandum of bill, provides a tax exemption for gain deriving from the sale of an apartment that is being used at present as an office space. The exemption will only apply if the apartment is sold by the end of 2012 and as long as it will actually be used as a dwelling place for at least 2 years following the sale. This exemption is restricted for 3 apartments and may preclude the exemption granted according to the temporary order (reviewed in tax alert no. 10)

It is important to stress that, at this stage, only the memorandum was published rather than an actual proposal of a bill Nevertheless, considering the temporary order and recent positions taken by the Israeli Minister of Finance, the message for both Israeli and non-Israeli investors is pretty clear – if you wish to have a built-in gain exempt from Israeli tax, you better consider selling your apartment soon!