Capital Gains Tax, Betterment Tax – What’s the Difference?
Capital Gains Tax and Betterment Tax. If you have done a real estate transaction in Israel, you certainly have heard of these two taxes. If you haven’t yet done a real estate transaction in Israel, then you should make yourself aware of these taxes and what they can mean for you.
Capital Gains Tax (“Mas Shevach” in Hebrew) is a tax on your profit from the sale of your property (house, apartment, store, land, farm etc.) The emphasis being on “sale”. Therefore, this tax is levied from the seller in the real estate deal.
Betterment Tax (“Hetel Hashbacha” in Hebrew) is a tax levied when a new town plan enhances the worth of a real estate property. It is levied when the property owner sells the property or uses the rights that this new town plan gave him. The emphasis being on “owners”. This means that the seller pays this tax.
Although these two taxes levied on sellers of real estate, you are allowed to stipulate in the sales agreement that the tax will be paid by the purchaser.
How is Capital Gains Tax calculated?
This is not an easy question to answer since the calculation of Capital Gains Tax is complicated. The basic answer is the price by which the seller paid when he purchased the property is deducted from the price which he is selling the property for, and the difference is his profit. This profit is taxed, and this is the Capital Gains Tax. Into this simplistic statement you through in many variables such as the linkage of the original purchase price to the Israeli CPI over all the years that the seller owned the property, legal fees paid during the original purchase and sale, real estate agency fees paid while purchasing and selling, renovation costs, interest paid on a mortgage, purchase tax paid when the seller purchased the property and yes, any Betterment Tax the seller will pay during the sale.
If the property being sold is a residential apartment there may be a total exemption from capital gains tax. If the property being sold is anything other than a residential apartment there is always Capital Gains Tax. The rules applying to exemptions from the tax have changed many times over the years and therefore you should always consult with your Israeli real estate attorney before embarking on a sale of real estate. Your real estate lawyer can make a rough calculation of the tax and help you look for ways to minimize the tax and save you money.
Once the tax office has calculated the tax it is wise to consult with your real estate lawyer to see if it is worth appealing the calculation.
Capital Gains Tax is paid to the Ministry of Finance. Betterment Tax is paid to the local municipality planning office.
How is Betterment Calculated?
Betterment Tax is calculated by the local municipality’s appraiser. Once he calculates the worth of the enhancement – which is the difference between the worth of the property before the change in the town plan and the worth of the property after the change of the town plan – the tax is 50% of the enhancement.
Examples of changes in town plans which will enhance the worth of property are new town plans that give additional building rights to an apartment, changes in zoning, transfer of agricultural land to residential land etc.
Before any real estate sale, the lawyer representing the seller should check for any change in the town plan that came in to effect after the seller purchased the property. If such a change took place, then there may be Betterment Tax. If this is the case, then it is important to consult with an appraiser to see how much the tax can be before entering into the transaction.
After the municipality’s appraiser has released his calculation, it is wise to show it to your own appraiser to see if it is worthwhile appealing the city’s calculation of the tax.
Nicole Levin
Nicole Levin Law Offices