Navigating the Israeli Property Market as a Foreign Buyer: Key Legalities, Taxation, and Requirements
Purchasing real estate in Israel as a non-resident offers opportunities for investment in a resilient and growing market. However, foreign investors must navigate complex legal frameworks and tax regulations, particularly regarding Israel’s capital gains tax on real estate (Mas Shevach). Here’s a comprehensive guide to help non-residents make informed decisions.
Can Foreigners Buy Property in Israel?
Yes, foreigners can purchase property in Israel, but the process involves additional steps:
- Proof of Identity and Funds: Investors must verify their identity and provide documentation of the source of funds to comply with anti-money laundering regulations.
- Land Ownership vs. Leasehold: Much of Israel’s land is under the Israel Land Authority (ILA) and sold as long-term leaseholds. Lease terms should be reviewed carefully by a qualified attorney.
Understanding Israel Capital Gains Tax on Real Estate (Mas Shevach)
Mas Shevach applies to profits realized from the sale of Israeli real estate. The tax rate is generally 25% for individuals but varies based on specific factors.
Calculating the Taxable Gain
The taxable gain is determined by:
- Sale Price minus the Original Purchase Price and eligible expenses (e.g., legal fees, improvements).
- Adjustments for Inflation and holding period.
For properties acquired before January 1, 2014, the linear method allows prorated taxation, reducing the taxable portion attributable to pre-2014 ownership.
Exemptions and Reductions
- Primary Residence Exemption (Israeli Residents): Residents may qualify for a full or partial exemption when selling their sole residence if certain conditions are met (e.g., minimum ownership period).
- Non-Resident Limitations: Non-residents generally do not qualify for these exemptions. Eligibility for reductions may depend on ownership of property in their home country and legislative changes that have tightened tax benefits for foreign sellers.
Example:
- Total Gain: ₪1,000,000
- Linear Apportionment: The portion of the gain attributable to pre-2014 ownership may qualify for reduced taxation, while the post-2014 portion is taxed at 25%.
The final tax liability depends on residence status, available exemptions, and time-apportioned gains.
Legal Framework and Due Diligence
Foreign buyers must engage a reputable Israeli attorney to manage the transaction and ensure compliance:
- Title Verification: Confirm the property is free from liens and encumbrances.
- Zoning and Building Rights: Verify the property’s status aligns with its intended use (e.g., residential, commercial, rental).
- Israel Tax Authority Compliance: Sellers must report the transaction to the Israel Tax Authority within 60 days and settle CGT promptly.
Financing and Mortgages for Non-Residents
Securing a mortgage as a foreign investor requires:
- Higher down payments and proof of stable income.
- Compliance with foreign currency regulations.
Engage a mortgage broker familiar with non-resident financing to simplify the process and secure favorable terms.
Best Practices for Foreign Investors
- Consult with Professionals: Work with experienced real estate attorneys and CPAs who specialize in non-resident transactions to ensure compliance and optimize tax strategies.
- Stay Informed on Regulatory Changes: Regularly monitor updates to Israeli property laws and tax regulations to remain compliant and seize new opportunities.
- Plan for Capital Gains Tax: Account for Mas Shevach in your investment strategy to minimize unexpected tax liabilities upon resale.
In Short
Foreign investors can successfully purchase real estate in Israel by understanding the legal structures, conducting thorough due diligence, and preparing for tax obligations like Israel’s capital gains tax on real estate. With the right professional support, careful planning, and informed decision-making, non-residents can confidently navigate this dynamic market while mitigating costs and ensuring regulatory compliance.
