Tax refunds to foreign residents on real estate investments in Israel

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When selling real estate in Israel, the State of Israel imposes on the seller a tax called “betterment tax”. This tax which is in nature “capital gains tax” is imposed on the betterment due to an increase in the value of the real estate during the period from the date of its acquisition until the date of its sale. According to the law, this tax is in principle an advance on account of income tax imposed on citizens of the State each year. Where the seller is an “ordinary” Israeli resident, then he is obliged to submit in Israel an annual tax return in which all his income is included, including profits from the sale of real estate. In the annual tax return, the tax liability is considered as a final tax. According to this settling of accounts, there are cases where it becomes clear where the seller is entitled to receive returns from the State for tax overpaid in a real estate transaction (or be debited for an additional amount). Consequently, there is nothing to prevent anyone who is not an “Israeli resident” (i.e. anyone who is a “foreign resident”) will prepare and submit an annual tax return in Israel, to refund tax according to an annual calculation. A number of reasons are likely to arise for a refund of tax, as follows:

  1. Today the tax rate on capital gains for an individual is fixed – 25%, but this is only for the period from November 2001(the profit is “linear” – and is recorded uniformly over the period from the date of the acquisition until the sale). The sale of real estate purchased before November 2001 will be considered as tax according to the ordinary marginal “tax brackets”. As during the year the Tax Authorities do not have sufficient information on the other taxable income of the foreign resident individual, so the Tax Authority usually calculates the tax advance according to the maximum tax rate (in 2020 47% + 3% surplus tax on high income). Therefore, at the time of submitting an annual tax return, it is possible to receive a tax refund if the seller is found to be entitled to benefit from low tax brackets (between 31% and 47% and often even less – if the seller is over 60 years old). It is also possible to carry out a process of spreading the tax over a number of years backwards, which is likely to increase the tax refunds even more.
  2. From the profit from the sale of real estate, it is possible to setoff capital losses, also those which are not actually from real estate (for example from the sale of business equipment, or from financial assets, e.g. marketable securities or nonmarketable securities). In suitable cases it is also worthwhile ensuring that also in previous years capital losses from various sales were created, and after suitable reporting it is possible to set them off against the profit from the sale of the real estate.
  3. Various expenses which were not setoff at the stage of calculating the tax advances, but it is possible to examine their setoff from profits at the stage of the annual tax return.

It is very important to remember that prior to the approach to the Tax Authorities, an in-depth examination should be carried out on various possible results. This as a result of tax traps as well as tax advantages. Every case according to its circumstances. Our advice is that every step connected with the Tax Authorities and even completing forms with the Tax Authorities, is likely to be accompanied by suitable professional consulting in order to avoid tax traps, which often the taxpayer doesn’t even think of.