Individuals (including foreign residents) who own three or more residential apartments in Israel will pay a new annual tax on the third apartment and above. The annual tax will be 1 % of the value of the apartment but limited to NIS 18,000 a year. This new tax on multi residential homes is supposed to be another measure to rein the soaring prices of homes and to encourage the sale of residential homes and thereby making more homes available for people buying them to live in. Whether this goal will be achieved is very doubtful according to the critics of the law. Most people believe that the new tax is unlikely to have the desired effect. Instead, in areas where the demand for apartments is high, the tax will be passed on to the tenants by raising the rents.

1. To whom does the new tax on multi residential apartments apply

The rule applies to an individual (also foreign resident) who owns three or more residential apartments in Israel and his accumulated ownership rate is 249 % or more. For example, an individual, who owns 100 % in two housing units and 50 % in a third housing unit is subject to the new tax, because the aggregate ownership rate is 250 %. In contrast, an individual, who owns 50 % in four housing units, will not be subject to the new tax, because his aggregate ownership rate is only 200 %.

The multi residential apartment tax is only applicable to a residential home, which is defined as an apartment or part of it, which is designed for residential use. It is thereby irrelevant, whether the apartment is actually used as office, holiday home or student apartment. In order to determine the amount of housing units an individual owns the general principle of a family unit is applicable. Thus, an individual and his/her spouse (except a spouse who lives separately on a permanent basis) and children under the age of 18 years old are considered as one owner. The rules also apply when the individual holds the apartment through a company which has not more than 5 shareholders.

2. Amount of tax

The amount of the multi residential apartment tax is a flat tax of 1 % of the value of the least valuable apartments, whereby the first two apartments of the taxpayer are exempt from the tax.  The taxpayer can choose for which housing units he wants to pay the tax. He will probably want the least valuable homes to be taxed. The value of the respective home is based on the assessed market value of the property on a square meter basis, without consideration to the real economic value of the apartment.  Homes for investments with an accumulated value of less than NIS 1,150,000 are not taxed. In case the accumulated value of investment apartments ranges between NIS 1,150,000 and NIS 1,400,000 there is a partial exemption according to a prescribed formula.  In any event the top tax for the third apartment and above would be NIS 1,500 per month or NIS 18,000 per year.

3. Payment of the tax

The Multi Residential Apartment Tax is to be paid at two dates. Half of the tax should not be paid later than the 30^th June of the tax year. The remaining balance is to be paid by December, 31 of the tax year.

For the tax year 2017 the taxpayer is obliged to file an assessment until March 31, 2017. In any following tax year, the tax officer will send a notice about an assessment at his best judgement with the determined value for every apartment and the amount of tax to be paid accordingly. Instead of this procedure the taxpayer can submit a return, in which he lists every apartment in his ownership and determines the apartments for which he wants to pay the tax, including the amount of tax and its calculation.

4. Grant for capital gains tax according to Regulations 

In the context of the “new multi residential apartment tax” regulations have been published, and a Form 7502 has been issued,  which provide for a grant with respect to capital gains tax upon the sale of a residential apartment,  which will be sold until October 1, 2017 by a taxpayer who is obliged to pay the multi residential apartment tax. A taxpayer who is obliged to pay the multi residential apartment tax and sells an apartment until October 1, 2017 will receive a grant of the capital gains tax to be paid upon the sale up to an amount of NIS 85,000. In case the taxpayer is exempt from the multi residential apartment tax the grant is half of the capital gains tax to be paid up to an amount of NIS 15,000. The right for the grant is subject to a number of conditions. One condition is that the residential unit is not transferred by gift or to a relative, and that the respective taxpayer does not purchase another residential property until December 31, 2020, except where the apartment so purchased would be at that time the only one he owns. If the taxpayer nevertheless purchases another residential unit, he will have to return the received grant with linkage differential.

5. Summary

The new tax on multiple apartments is effective as of January 1, 2017. Individuals, whether Israeli residents or foreign residents, who own three or more homes in Israel should examine whether they are obliged to pay the new tax and if yes, should examine for which apartment they should pay the tax and calculate the amount. The new rules are not simple to apply. As stated above it is very doubtful whether the intended goal of the new tax will be achieved. One thing is certain the new tax is disproportionate and lacks equality. For example the owner of one housing unit worth NIS 5 million is not subject to the new multi residential apartment tax, while the owner of three housing units worth an aggregate value of NIS 3 million has to pay NIS 18,000 per year.  Furthermore, the owner of three housing units with an aggregate value of NIS 30 million pays NIS 18,000 a year, while an owner of three housing units with an aggregate value of only NIS 5.4 million pays the same amount of NIS 18,000 per year.