Want to Pay Less Tax (Legally)? Discover the Hidden Trick in Israel’s Real Estate Law

Ever heard of a legal way to pay significantly less tax when selling part of a property?
Most people haven’t—and it could save you tens of thousands of shekels. This isn’t a loophole. It’s built into Israeli real estate tax law. And yet, countless property owners, investors, and even professionals overlook it entirely.

Let’s unpack this hidden gem—Section 22 of the Real Estate Taxation Law—in plain, everyday language. No legal jargon. Just clarity, strategy, and a bit of real estate wisdom.

Why This Matters: Selling Part of a Property Is a Tax Puzzle

Picture this:
You own a building. Maybe you inherited it. Maybe you and a group of investors bought it together years ago. Now you’re ready to sell part of it—not the entire building, just one section.

For example, let’s say your building has:

• A ground-floor commercial unit
• Two upper floors for residential use

You decide to sell only the commercial space on the ground floor. Here’s where it gets interesting…

Understanding Capital Gains Tax (AKA Mas Shevach)

Before diving deeper, let’s break down Mas Shevach—the Israeli version of Capital Gains Tax (CGT).
This is the tax you pay on the profit you make when you sell a property.

Capital Gain = Sale Price – Purchase Price
Then you pay tax (Mas Shevach) on that gain.

Sounds simple, right? Well, not always…

What Happens When You Sell Just One Part?

Now here’s the tricky part: You didn’t buy just the commercial unit—you bought (or inherited) the entire building.

So when the Tax Authority wants to calculate how much profit you made on the sale, they ask:

• How much did you sell the unit for?
• How much did you buy that specific unit for?

But you never bought just that unit. You bought the whole building. So how do you figure out the “purchase price” of just the section you’re selling?

That’s where Section 22 of the Real Estate Taxation Law comes into play.

Section 22: The “Surface Area Shortcut”

According to Section 22, when you sell part of a property, the default method to calculate the purchase price for tax purposes is this:

Use the ratio of floor area (size in square meters).

So if the entire building is 300 square meters, and you sold a 100-square-meter unit, then you sold 1/3 of the property.

The Tax Authority will assume:

• You bought that section for 1/3 of the original purchase price.
• You made a profit based on that 1/3.

But here’s the catch:
Not all square meters are equal in value.

Value ≠ Size: Some Parts Are Worth More

Let’s say that commercial unit you sold on the ground floor is in a prime location—street-facing, foot traffic, high rent potential. Even though it’s only 1/3 of the total area, it could easily represent 50% or more of the building’s total value.

So why would you agree to be taxed as if it’s only worth 1/3?

You shouldn’t. And the law gives you a way out.

The Legal Trick: Proving the Value Difference

Here’s the key opportunity:
You’re allowed to prove that the part you sold was worth more than its share of the total size.

The Supreme Court even confirmed it in the landmark “Meron” case.

There’s a twist, though:
You can’t use today’s prices to make your case. You have to show what the value split was at the time you acquired the property—even if that was 10, 20, or 30 years ago.

Sounds impossible? Not really.

How to Do It: Work With a Valuation Expert

You’ll need a real estate appraiser (shamay) to:

• Reconstruct the market value of the part you sold (and the rest of the building)
• Estimate how much that section was worth at the time of purchase

Even a rough historical valuation—as long as it’s credible—can be accepted.

Why? Because the court said that even if your evidence is “imperfect” or provided “in a rough way,” the Tax Authority must consider it if you prove your case.

Why the Tax Authority Might Accept It Without a Fight

Here’s the kicker:
They don’t want to get dragged into a value debate every time someone sells part of a property. So if you bring solid (even if minimal) proof—they’ll usually accept it and let you pay less tax.

They won’t love it, but they’ll agree.

Real-World Tip: When It’s Worth Doing This

This strategy is especially smart when:

• You’re selling commercial units (which tend to have higher value per square meter)
• The unit has prime location features that increase its market value
• The rest of the building has lower market demand (like old residential floors)

Step-by-Step: How to Pay Less Capital Gains Tax (Legally)

1. Know what you’re selling.
   Break down the property: area, use, location, condition.
2. Estimate how much it’s worth.
   Not just the part you’re selling—but the whole building.
3. Get a professional valuation.
   Ask a certified real estate appraiser to reconstruct the values at the time of purchase.
4. Submit your claim to the Tax Authority.
   Include the appraisal and clear documentation showing why the sold portion is worth more than its size ratio.
5. Be ready to defend it (but you probably won’t need to).
   If your evidence is reasonable, they’ll likely accept it.

TL;DR – Too Long; Didn’t Read

• When you sell part of a property, you usually get taxed based on the area ratio (size).
• But you can legally pay less tax if the part you sold was worth more than its size share.
• The Supreme Court allows this if you prove the value difference existed at the time of purchase.
• Even rough or partial proof can work—use a real estate appraiser.
• This tactic can significantly reduce your capital gains tax.

Final Thought: If You Know More, You Pay Less

This strategy isn’t a loophole. It’s a smart use of the law—and perfectly legal.

So if you (or your client) are planning to sell part of a building, don’t default to the standard tax calculation. Get expert help, dig into the numbers, and you might save a serious chunk of change.

Pay what you owe—but not a shekel more.