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Capital Gains Tax When a Foreign Resident Sells in Israel

Q: Is there tax if I sell at a loss?

If the indexed cost and expenses exceed the sale price there is no gain and no land appreciation tax, but the sale must still be declared. Losses may be usable against other gains under the Real Estate Taxation Law; ask your accountant.

Q: What if I inherited the apartment?

Inheritance itself is not a sale under the Real Estate Taxation Law. When the heir later sells, the gain is generally calculated by reference to the deceased's original purchase, with rules in the law on which date and cost apply.

Q: Can the buyer be made responsible for my tax?

No, the seller remains liable, but the buyer can pay part of the price to the tax authority on the seller's account and is entitled to withhold funds until the clearance is issued.

Keys and a signed sale contract on a table

When a non-resident sells rights in Israeli real estate, the seller pays land appreciation tax (mas shevach) on the gain under the Real Estate Taxation Law 5723-1963. The gain is the difference between the sale value and the indexed purchase cost plus allowable expenses, and the tax is reported to the Israel Tax Authority by the seller within the same kind of deadline that applies to a buyer. The exemption for the sale of a single residential apartment exists, but for a foreign resident it comes with an additional condition that often decides whether it is available. Rates are not given here because they change; check the current figures.

How the gain is calculated

Start with the sale price, or market value if the price is not at arm's length.
Deduct the original purchase price, adjusted for inflation by the consumer price index from the purchase date.
Deduct allowable expenses: purchase tax paid, lawyer's and broker's fees on both purchase and sale, improvements to the apartment with receipts, and certain financing costs where the law permits.
Where the apartment was held for a long period, the law treats parts of the gain differently by period of ownership, including a linear calculation for residential apartments bought before a date set in the law. Your lawyer or accountant runs the computation.

The single-apartment exemption and the foreign-resident condition

The Real Estate Taxation Law exempts the sale of a 'qualifying residential apartment' by a seller who meets the conditions, the central one being that it is the seller's only residential apartment. For a foreign resident the law adds a further requirement: the seller must show that they do not own a residential apartment in their country of residence, normally by a certificate from the tax authority of that country. Without that proof the exemption is not granted even if the Israeli apartment is the seller's only property in Israel.

Start obtaining the foreign certificate early; some tax authorities do not issue such documents easily.
The exemption has holding-period and prior-use conditions as well; an exemption used recently can block the next.
If the exemption is not available, the tax is calculated on the gain under the general rules.

Reporting, clearance and the buyer's withholding

The seller files a declaration with the Israel Tax Authority within the deadline counted from the contract date, together with a self-assessment. The tax authority issues an assessment and, once the tax is paid, a clearance certificate. The Land Registry will not register the buyer without that certificate, so a seller who is slow to deal with tax blocks their own deal.

Because of this, Israeli sale contracts allow the buyer to hold back part of the price until the seller delivers the clearance. The Real Estate Taxation Law also provides for the buyer to pay part of the price directly to the tax authority on account of the seller's land appreciation tax when the seller has not obtained clearance. Expect your buyer to insist on one of these mechanisms.

Betterment levy and other costs on sale

Separately from land appreciation tax, the local planning committee may charge a betterment levy (hetel hashbacha) under the Planning and Building Law 5725-1965 if a plan approved during your ownership increased the value of the property. It is payable on sale, and the buyer will require proof that it has been settled or secured. Add municipal clearances, the broker's fee and your lawyer's fee to the sale costs.

Your home country and double taxation

Israel has tax treaties with many countries, and most treaties let Israel tax gains on Israeli real estate while giving the home country a credit or exemption. The Israeli tax is paid first; the home-country return comes afterwards. Give your home accountant the Israeli assessment and the clearance certificate. If your home country taxes the gain in a different currency or on a different basis, the two calculations will not match, and that is normal.

Common mistakes

Assuming the single-apartment exemption applies without the foreign residence certificate.
Losing receipts for renovations and professional fees, which reduce the taxable gain.
Signing a sale contract without a clause on who bears the betterment levy.
Leaving the tax declaration to the lawyer without checking the self-assessment yourself.
Forgetting that a gift to a relative or a transfer to a company can itself be a taxable event.

FAQ

Is there tax if I sell at a loss?