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Tax aspects of purchasing a residential apartment for investment – Indivdual Vs. Company

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The thriving real estate market in IL encourages many investors to purchase an apartment for long/short term holding and enjoying its rent fruits meanwhile.

What is the best way of purchasing such an apartment? As an individual or as a company?

In case of considering purchasing the apartment under a company, the starting point should be that it would be rented to a 3rd party who is not the company’s owner or any of his relatives. Otherwise the purchase would be considered as if the owner itself purchased it under a cover of company.

After clarifying the goals and targets of the purchase, there are several different tax aspects to examine before making the decision:

 

Funding the purchase – cheaper as a company

Earning the money for purchasing an apartment would be cheaper for a company than for an individual, since a company only pays 23% income tax, whereas an individual pay almost 50% (including Bituach Leumi) for the same incomes. However, the entity who would own the apartment would be the company and not its owner, and therefore, if someday the owner of the company would sell it and would like to take the money “back home”, he/she would need to pay additional 30% dividend tax (and probably extra 3% high income tax).

 

Purchase Tax – cheaper as an individual

An individual would enjoy significant tax exemptions and lower tax brackets when purchasing an apartment – especially if it’s the first one, whereas a company would pay 5% from the first Shekel of the apartment’s price regardless of its number (first/second/third etc.) and up untill 10% by brackets.

 

Tax on rent incomes – cheaper as individual (unless the company was established as transparent)

An individual would have 3 wider and cheaper tax options on the rent incomes – exemption up until 5K NIS / 10% flat / margin tax with including expenses – whereas a company would pay 23% corporate tax without any other option*.

*unless the company was established as transparent – “Home Company” and then the 3 tax options for an individual would apply.

 

VAT – cheaper as an individual

Here purchasing 2nd hand apartment as an individual would save a high amount of money and avoid tax accident. When a company purchases a 2nd hand apartment from another individual the company would have to pay 17% VAT Deals Tax of the purchase price to the IL state with no option to receive a credit or a refund of the VAT tax in it (unlike deducting the VAT from business expenses it has). Purchasing a new apartment (usually from a real estate company) would make no difference if bought by individual or a company.

 

Capital Gain Tax – indifferent if not taking the money “back home”

If the seller is an individual, only 25%* capital gain tax would apply (assuming the purchase date of the apartment was after 2011), and almost the same goes for a company – 23% of corporate tax. However, if the owner of the company would like to take the money of the sale “back home” (for personal usage) additional 30%* dividend tax would apply.

*another 3% high income tax would be added if the person accumulates total incomes of over 650K NIS at the year of the sale.

 

To summarize, purchasing an apartment for investment has different tax implications (not all were listed above) that varies between the basic 2 options of doing so – as an individual or as a company, and it is always recommended to consult beforehand.