Authored by Boaz Feinberg and Dov Berzon
On 29 July, 2024, the real estate tax regulations[1] concerning transfer tax on residential properties for new immigrants were amended. Finance Minister Bezalel Smotrich said: “The State of Israel embraces immigrants. Especially during this time, we as a nation must do everything possible to ease the transition for new immigrants returning home from around the world. Today, we have taken another important step for both immigrants and the State of Israel“.
Headlines in the economic press left no doubt: new immigrants will now pay a reduced transfer tax compared to previously, even on luxury properties! However, a closer examination of the new regulations (and who they apply to) reveals that, for many immigrants, particularly those looking to purchase higher-value properties, the amendments are not a benefit at all, but rather impose a greater tax burden.
Since 1974, new immigrants to Israel have been entitled to a certain discount on the transfer tax paid when buying a home or a business property in Israel that is intended for their own use. Currently, non-immigrants are required to pay between 8% and 10% on residential property purchases, unless it is their first property in Israel, in which case they qualify for reduced tax brackets, but only if they are Israeli residents at the time of purchase (or, if within two years of the purchase date they move to Israel). In contrast, since 1974 and until the recent amendment, new immigrants paid a transfer tax rate of 0.5% on the first bracket (currently up to 1,978,745 ILS, approximately $534,796) and 5% on any amount exceeding that, with no cap. This benefit applied only to new immigrants (i.e. those who hold an immigrant visa, immigrant certificate, or type A1 temporary residency permit), and only if the property was used as their dwelling home. Additionally, according to a District Court ruling, it was not sufficient just to hold an immigrant certificate—the buyer had to prove that they actually resided in the property, as an Israeli resident.
Now, with the recent amendment welcomed by the finance minister, several key changes have been introduced:
- Purchase of “Off-Plan” Properties from Developers:
Previously, new immigrants could benefit from the transfer tax reduction only if they moved to Israel within one year of purchasing the property. In many cases, foreign residents considering immigration purchased properties from developers, but construction wasn’t completed within a year, forcing the immigrant to choose between several bad options: giving up the property, losing the transfer tax reduction, or moving to Israel before the property was ready. Following the amendment (which is certainly a positive change), new immigrants who sign an agreement with a developer are eligible to receive the tax benefit for up to three years prior to their arrival in Israel, instead of just one year. - Requirement for the Property to Be Used as a Residence:
Before the amendment, the transfer tax benefit was only available if the property was used as the immigrant’s dwelling home. This requirement has now been removed, likely due to the practical challenges of verifying whether the purchased property was actually being used as the immigrant’s residence. - Changes to Transfer Tax Rates for Immigrants:
Previously, the transfer tax rate for immigrants ranged from 0.5% on the first bracket to 5% with no cap. Now, following the amendment, the new brackets are as follows:
- For the portion of the property value up to 1,978,745 ILS (approx. $534,796) – no tax will be payable.
- For the portion of the value exceeding the first bracket and up to 6,055,070 ILS (approx. $1,636,505) – a tax of 0.5% will be applied.
- For the portion exceeding 6,055,070 ILS and up to 20,183,565 ILS (approx. $5,455,018) – a tax rate of 8% will be applied.
Unlike previously, if the property value exceeds 20,183,565 ILS (approx. $5,455,018), the new immigrant will not be eligible for any reduced tax rate at all and will be required to pay the standard transfer tax rates that applies to non-immigrants.
Practical Example of the Changes: Below is a table comparing the actual transfer tax that would be imposed on new immigrants purchasing properties of varying values, before and after the amendments to the regulations, as well as a comparison to the tax brackets applicable to non-immigrants:
As can be seen from the table, it appears that the amendment has indeed provided a significant benefit for new immigrants purchasing properties worth $1,000,000, or less. However, those intending to buy more expensive properties, worth more than $3,500,000, will end up paying more in transfer tax compared to before the amendment. Does this constitute an “embrace for new immigrants”? Perhaps, but only for some.
Special attention should also be paid to the applicability of the new regulations concerning immigrants who moved to Israel before the amendment took effect on 15 August, 2024. These individuals are eligible to choose whether to apply the benefits under the pre-amendment or post-amendment regulations, unless the property was already purchased before the amendment, in which case only the pre-amendment regulations will apply.
[1] Land Tax Regulations (Land Appreciation and Transfer)(Transfer Tax), 1974.
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