Industry "Hacks" for buying Real Estate in Israel

Recent events around the world have caused many to wonder whether the situation of their Jewish community is more precarious than they thought. In this reality, the prospect of buying real estate in Israel has emerged as a viable option, whether to make Aliyah, or just as an "insurance policy" should things get even worse.

Purchasing real estate, however, could present certain barriers in terms of equity requirements and purchase tax liability. The following are some less known options for dealing with these issues:  

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1. Equity Requirements

 

In Israel, foreign buyers are eligible for a loan of up to 50% of the value of the property they are buying, while the rest must come from their own sources. Here are a few ways to come up with that equity:

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a. Home Equity Line of Credit (HELOC)

If one owns real estate overseas, then a line of credit can be secured using the real estate property as collateral. These funds, once transferred to Israel, are seen as equity for the purpose of the property that is being purchased in Israel, and therefore can be used the 50% mortgage which one can get for the property in Israel.​

 

b. IRA funds

Individual Retirement Accounts are a form of a long-term savings account with tax advantages. As a rule, there is a list of financial products in which the funds can be invested. Depending on the rules of the specific account, there could be an option to invest the funds in real estate assets as well- including real estate in Israel.

As a side note, in many instances these sorts of accounts involve trusts. Trusts (in the way they are used in the US) are not a recognized as legal entities in Israel, and therefore an LLC will be established and the purchase will be done in its name.

 

c.Private mortgage to avoid gift tax

Relevant in the following scenario: A property is being purchased via a family member as the official buyer (usually a parent or a child of the person with the funds- and this for tax purposes [see below]). The funds exist to make the equity payments for the purchase, but transferring them over to be used by the "buyer" for the purchase will generate liability for gift tax. To avoid this, the transfer can be made as a private loan or mortgage, given by one family member to the other. In this way, the funds are not a gift, but a loan to be repaid in the future. A mortgage is then registered on the deed of the property in the name of the parent (or child) who provided the loan.

 

2. Purchase Tax

A second barrier for purchasing real estate in Israel is the purchase tax which, for a foreign buyer, stands at 8% of the purchase price.

A couple of suggestions in this regard:

 

1. Buying via a family member

As mentioned, an individual who lives abroad and is interested in purchasing real estate in Israel will face an 8% purchase tax, which could translate into tens or even hundreds of thousands of NIS. However, one could purchase the property via a first-degree relative, for example a child who is making Aliyah or children who are coming to live in Israel for a few years, and thereby enjoy one of two tax breaks which they might be eligible for – Single Residency Tax (for someone who lives in Israel and establishes residency while not yet making Aliyah and becoming a citizen) or Oleh Tax (for someone who made or will be making Aliyah).

In such a situation, the entire purchase process will be initiated in the name of the child, and ultimately the property will be registered in their name. At some point after that, if desired, the property could be gifted back to the parent who provided the funding. Gifting a real estate property is considered a transaction but has reduced tax rates. In this way, the parents are able to purchase the desired property while saving thousands of NIS.

 

For general information, the discounted tax rates are as follows:

 

Single Residency Tax

0 – 1,975,745 NIS : 0%.

1,978,745 NIS – 2,347,040 NIS: 3.5%.

2,347,040 NIS – 6,055,070 NIS: 5%.

6,055,070 NIS – 20,183,565 NIS: 8%.

20,183,565 NIS and above: 10%.

 

This applies to an Israeli resident and could also be claimed retroactively if a person establishes residency within 2 years of purchasing the property.

 

Oleh Tax Rate

0-1,978,745 NIS: 0%.

1,978,745 NIS – 6,055,070 NIS: 0.5%.

6,055,070 20,183,565 NIS: 8%.

 

This rate can be claimed within 7 years of making Aliyah, or retroactively if one makes Aliyah within a year of purchasing the apartment (and in the case of new construction, potentially within 3 years of purchasing)

 

b. Buying in Yehuda V'Shomron (over the "Green Line")

For historical reasons, the laws prevailing in areas over the Green Line, are not necessarily identical to those in the rest of the country. One of these differences is that foreign residents (as long as they do not hold Israeli citizenship) are exempt from purchase tax when purchasing a property. The same holds true for capital gains tax when selling a property. To illustrate, this rule applies in Gush Etzion (Efrat, Alon Shvut, Neve Daniel, Tekoa) as well as Ariel, Ofra, Ofarim and more…)

This rule could be especially relevant if the purpose of the purchase is as an investment, or on the other side- if one is looking to make Aliyah in the future- to purchase the property ahead of time and enjoy the complete exemption while one is still a foreign resident.

 

The above is provided as general information. Specific advice will be provided on an individual case basis. For more information…