This section reviews the cases in which a claim can be filed under this section, the type of mechanism it offers to address the decrease in property value, the taxation of the compensation received under it, and the deadlines for filing such a claim.
What is Section 197?
Section 197 of the Planning and Building Law provides compensation to property owners who are harmed by a planning scheme that is not an expropriation. For example, the approval of a new zoning plan for a shopping center, road, or even residential areas. If the change in the plan is believed to cause a decrease in the value of the property, compensation can be claimed under this section. The right to claim is for the damage caused by the plan approved by the planning authorities.
The case law has established the formula for calculating the compensation for the property: the compensation is calculated by assessing the value of the property before the harmful plan and after it, with the resulting difference being the amount of compensation the owner is entitled to. Proper planning of the compensation path can save tax payments in certain cases.
Compensation Under Section 197:
The use of Section 197 is relatively limited, and local committees can offer alternative compensation mechanisms with different tax implications. Generally, compensation for the decrease in property value is not considered taxable income since it is not a sale of property or a sale of rights in property. Therefore, if you receive a notice of an approved plan that might reduce the value of your property, it is advisable to consult regarding the tax considerations arising from the transaction before reporting it.
“Section 197 of the law balances, as mentioned, between the property rights of the property owner and the public interest in the orderly and efficient operation of the planning authorities without creating a chilling effect that deters planning.” BRM 10212-16 Dali Dalya and 333 others v. Herzliya Local Planning and Building Committee.
Unlike expropriation, where compensation is given only for final changes in land use, the mechanism established in section 197 of the planning and building law.The use of the mechanism in section 197 of the planning and building law is intended to compensate the property owner and even the holder of rights in the property as a result of the plan’s impact. thus, compensation under section 197 makes the process quicker, simpler, and more economical compared to compensation given through expropriation.
In order to understand the tax implications arising from compensation under section 197 of the planning and building law, it is first necessary to classify the receipt as a source of income and then derive the tax from that classification. In many cases, it can be argued that this compensation is not subject to tax at all.
Section 197(a) of the Planning and Building Law
Section 197(a) of the Planning and Building Law grants the right to compensation for changes affecting real estate due to a plan by the local committee. However, not every planning change entitles compensation. Section 200 of the Planning and Building Law lists ten cases in which no compensation will be paid to the property owner, assuming the damage is “reasonable” (a term subject to interpretation).
Changes in Zoning and Land Use Conditions:
Israeli law also allows for other compensation mechanisms for these plans, such as the transfer of building rights, voluntary sale, and more. Recent rulings indicate that in situations where multiple different plans are approved for the same property, each eligible plan may be entitled to compensation individually under Section 197 or through other means prescribed by law. For example, Civil Appeal 1829-13 Vizhnitz Beit Yisrael and Damascus Eliezer Yeshiva v. Jerusalem Land Tax Administrator.
When dealing with one plan or several plans affecting the same land, the following should be noted:
- The plan cannot expire.
- Compliance with the conditions of Section 200 of the Planning and Building Law, which stipulate the exceptions to compensation.
- When multiple plans affect the same land, each plan’s compensation mechanism must be examined, as each has different tax implications.
Another important aspect is the statute of limitations for filing a compensation claim under Section 197, which is shorter and only three years. If you believe an approved plan affects the value of your property, you should examine the different compensation mechanisms and carefully consider the various ways to realize the compensation. Choosing alternative routes may impact the receipt of compensation under Section 197, so it is advisable to consult with experts to plan the compensation claim process and determine the best route to take.
Tax on Compensation Under the Planning and Building Law:
According to the Tax Authority, compensation under Section 197 is subject to a tax rate of 25%-33%, depending on the circumstances. In our opinion, there is definitely a justification to argue that the compensation is not taxable at all.
So, what should you do?
Contact us as early as possible! We will coordinate with your lawyers and try to reach an agreement that allows for a tax exemption. Then, we will draft an opinion stating that the compensation for the property is tax-exempt and contact the Tax Authority to obtain approval, which you will then submit to the local authority or municipality. If you have already received the compensation and tax was withheld at the source, there is still action to be taken. In many cases, we have obtained substantial refunds from the Tax Authority.
