Taxation of Investment Apartments in Israel: What to Check Before Purchase

Purchasing an Investment Apartment

An apartment purchased in addition to a first or sole apartment is generally considered an investment apartment and is taxed differently. According to the source, the purchase tax on an investment apartment has for several years stood at 8% of the full value, including VAT. This payment may therefore significantly reduce the investment return even before the apartment is rented out.

Rental Income and Sale

The rental-income exemption ceiling cited in the article is NIS 5,654 per month, and it changes annually. When the ceiling is exceeded, two options are described: a fixed tax of 10% of income with no deductions, or an adjusted exemption track, which may be more worthwhile in certain cases. Upon sale, capital gains tax is 25% of the profit; for apartments purchased before 2014, the period through January 2014 is exempt from this tax, according to the explanation provided.

Number of Apartments and Ownership of Shares

The source presents not a binding directive, but a position from a draft Israel Tax Authority guideline that was subsequently withdrawn. Under that position, ownership of one to five apartments is generally considered a passive investment, the range of five to ten apartments falls within a “gray area,” and ownership of more than ten apartments is considered business activity. When shares are purchased, the Israel Tax Authority may examine the structure's true substance: for example, three one-third shares in apartments in a single building may effectively be considered ownership of one whole apartment.

Transfer as a Gift and Sole-Apartment Status

Under the Real Estate Taxation Law, transferring an apartment as a gift to a family member may be exempt from capital gains tax. However, a restriction applies to brothers and sisters: the exemption is available if the entire property was received from the parents as a gift or inheritance. Purchase tax on a gift transfer remains applicable. If the gift recipient is under 18, the example provided imposes the full 8% tax in accordance with the parent's status; an adult recipient pays one-third of the tax rates applicable to a sole apartment, and in the cited example, a value of up to NIS 2 million is tax-exempt.

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