For many foreign residents who own property in Israel, selling an apartment is seen as a natural and simple process: signing an agreement, reporting to the authorities, and paying tax accordingly. In practice, this is one of the most complex tax events in Israeli real estate law, one that can result in paying an extremely high capital gains tax, even in cases where the seller was certain that he was entitled to an exemption.
Attorney Daniel Segev, an expert in real estate taxation and supporting foreign residents, explains that in recent years the Tax Authority has been examining transactions by foreign residents with a magnifying glass. “Since the reform in the taxation of residential apartments, a foreign resident has been required to actively prove his entitlement to benefits. Anyone who is not prepared for this in advance may find themselves with a tax assessment of tens or even hundreds of thousands of shekels.”.
Until 2014, foreign residents enjoyed similar treatment to Israeli residents in terms of exemption from capital gains tax on a single apartment. However, Amendment 76 to the Real Estate Taxation Law and Executive Order 5/2013 changed the rules of the game.
The goal, according to the Tax Authority, was to reduce tax benefits for those whose center of life is not in Israel. Since then, a clear presumption has been established that a foreign resident is considered to own an additional residential apartment in his country of residence. This means that in order to benefit from the exemption from capital gains tax on a “single apartment” in Israel, the foreign resident must prove that he does not own an additional residential apartment anywhere in the world.
The Tax Authority's examination does not focus only on the seller himself. According to the implementation instructions, the situation of the entire "family unit" will be examined, which includes a spouse and children up to the age of 18.
“It is enough for the spouse to have one apartment in the country of residence to negate the entire exemption,” emphasizes Attorney Segev. “This is a point that many are not aware of, and it is precisely there that the most expensive mistakes occur.”.
This is where the real difficulty begins. Executive Order 5/2013 requires the seller to provide official confirmation from the tax authorities in his country of residence indicating that he does not own a residential apartment.
The problem is that in many countries, such as the United States, the tax authorities do not issue such a certificate at all. “It’s an absurd situation,” explains Attorney Segev. “The law requires a document that doesn’t always exist.”.
The solution, he says, lies in the professional interpretation of the later implementing directives. Through legal affidavits, tax residency certificates, long-term leases, and supplementary documents, it is often possible to convince the real estate tax director to recognize eligibility for exemption, even without formal approval.
Even when a foreign resident is not entitled to a full exemption, for example if he owns an apartment in Paris or New York, this does not mean that he pays full tax on the entire profit. Executive Order 5/2013 allows the use of a "better linear calculation".
According to this mechanism, the appreciation accumulated until January 1, 2014 is exempt from tax, and only the profit accumulated thereafter is taxed at a rate of 25%. For assets that have been held for many years, this is a dramatic difference. “In quite a few cases, the savings reach hundreds of thousands of shekels,” notes Adv. Segev, “but only if the calculation is done accurately, including linkages and depreciation.”.
Capital Gains Tax for a Foreign Resident Paid on the actual profit, not the sale value. Therefore, deducting expenses is a critical tool in reducing tax liability. Attorney fees, brokerage fees, renovations, real interest on a mortgage, improvement levies, and fees can all significantly reduce tax, provided they are properly documented.
One of the biggest surprises for non-residents who sell a rented apartment is the depreciation deduction. Even if the seller never claimed depreciation on their annual reports, the Tax Authority will deduct “notional depreciation” from the purchase price.
The depreciation rate for a residential apartment is usually about 21% of the cost of the building per year. Over 20 years, this is a significant reduction that increases the appreciation and the tax payable. “This is a clause that creates a huge gap between the tax the seller expected and the actual assessment,” says Attorney Segev.
The sale of property in Israel by a foreign resident is a complex legal-tax procedure, with an increased burden of proof and broad discretion for the tax authority. Errors in calculation, reporting, or filing documents can be costly.
Real estate lawyer The specialist in accompanying foreign residents knows how to identify in advance eligibility for exemption, build a proper evidentiary infrastructure, manage the conduct of real estate taxation, and ensure that the tax is calculated according to the law - and not beyond it.
The difference between selling an apartment in Israel by an Israeli resident and a foreign resident is dramatic. Anyone who plans a sale without preparing in advance may pay a heavy price. Proper planning, which begins even before the sales agreement is signed, can save significant amounts of money and ensure that the property yields the maximum return.
The office of Attorney Daniel Segev specializes in assisting foreign residents in the sale of properties in Israel, while fully maximizing the benefits and protecting the client's economic interests.
Contact: 09-7665531
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