Everyone knows there is an obligation to report to the Land Taxation Authority and pay Capital Gains Tax (Mas Shevach) when selling an apartment. However, not everyone is aware that it is often possible to save a significant amount on the tax payment. Checking the possibility of spreading the Capital Gains Tax is the most important thing a seller can do. When a real estate property is sold in Israel, Capital Gains Tax is imposed on the profit accumulated during the holding period of the property. Under certain circumstances, the Capital Gains Tax payment can be reduced, potentially saving tens of thousands of shekels when selling the property. The option for spreading the tax is available from the year the property is sold up to four years after the sale.
Who Can Spread Capital Gains Tax?
Israeli case law has established that only individuals, not companies, can benefit from the tax spreading option. This was determined in CA 3012-18 Real Estate Tax Authority Haifa v. Twenty Hundred Nahariya Ltd. (published in Nevo, 04.04.2019). However, not everyone should necessarily opt for this benefit; it depends on the seller’s personal circumstances such as income, age, health status, and other factors.
Eligibility Criteria for Spreading Capital Gains Tax:
- The seller must be a resident of Israel.
- The spreading period can be up to four years or the period of ownership of the property, whichever is shorter. The seller can request to spread the tax over a shorter period.
- The seller must file reports according to Section 131 of the Income Tax Ordinance for the spreading period.
How It Works:
Many property sellers pay the Capital Gains Tax without checking if they qualify for a tax reduction. In practice, the spreading of Capital Gains Tax works by dividing the real gain over the years in which it is spread and including it in the seller’s taxable income. Every Israeli resident has tax credits that can reduce their taxable income regardless of the actual payment of the Capital Gains Tax. Spreading the tax is particularly beneficial for sellers entitled to additional tax credits under certain circumstances according to the Income Tax Ordinance. This mechanism allows the seller to utilize their tax credits and significantly reduce the Capital Gains Tax payment. Conversely, if the seller pays the tax in one tax year, their taxable income increases, and the tax brackets rise accordingly.
When Selling Real Estate, We Recommend Consulting a Real Estate Tax Expert, Especially in the Following Cases:
- Inheritance: When receiving an apartment through inheritance, the legal rule is that the heir steps into the shoes of the deceased. Therefore, the seller is liable for the Capital Gains Tax that the deceased would have owed if they were alive. In this case, if the deceased was entitled to spread the tax, the heir would also be eligible for this benefit, saving on the tax payment. Real Estate Tax Authority Decision 5825/12.
- Gift from a Relative: Case law has determined that when a property is given as a gift from a relative, the recipient can spread the Capital Gains Tax similarly to an inheritance. If the donor was entitled to spread the tax, the recipient would also be eligible, provided the gift was given in good faith. V.A. (TA) 1290/09 Gotzeit et al. v. Real Estate Tax Authority, Tel Aviv District (published in Nevo, 14.2.2012).
- Divorce: In the division of property during divorce, Israeli case law has established that the Capital Gains Tax can be split equally between the spouses, allowing each to spread the tax over four years, thereby significantly reducing their tax liability. AMA (Tel Aviv-Jaffa) 6-97 Nir Yosef v. Netanya Tax Assessor.
- Spreading the Capital Gains Tax payment can benefit many sellers, saving them tens of thousands of shekels. The process involves two stages: an initial, brief check of whether spreading is beneficial, and if it is, proceeding with the process in coordination with the clients.
