Israel’s housing market has been recording dramatic price hikes for a little over a decade. This is a relatively short time frame relative to price hikes of such magnitude. For example, according to the housing price index published by the Israeli Central Bureau of Statistics, housing prices rose last year by the cumulative rate of about 15.2%. In other words, if the price of an average apartment in Israel was about ILS 1.081 million in 2010, by 2020, the average price rose to about ILS 1.58 million. Due to the pace of population growth in Israel, a relatively small country, there is a constant demand for housing, mainly in the central Dan region. Therefore, housing prices are especially high.

These price hikes indeed make Israeli real estate attractive, but they also make every transaction more significant. Therefore, it is imperative buyers not only find the right property for themselves, but also gain an understanding of the stages of purchasing real estate in Israel, Israeli real estate laws, and the most important aspects of real estate transactions in Israel.

Real Estate Taxation in Israel

When buying or selling a residential apartment in Israel, two main types of taxes apply: betterment tax (also known as capital gains tax) and purchase tax. Unless the parties agree otherwise, the buyer of the apartment pays the purchase tax, while the seller of the apartment pays the betterment tax.

The purchase tax rate that applies to the buyer during a real estate transaction depends, inter alia, on the number of apartments he owns at the time of purchase. If this is his only apartment in Israel, the buyer will benefit from an exemption up to the price bracket specified in the Real Estate Taxation Regulations. Above that price, the buyer will pay graduated tax according to that defined in the regulations. If the buyer has more than one apartment, then he has no entitlement to this benefit and will pay a higher property tax rate according to that specified in the regulations.

Taxation of Israeli Residents vs. Foreign Residents

As stated, if the purchased apartment is the buyer’s only apartment and he is a resident of Israel, he can benefit from the exemption and the lower purchase tax brackets. On the other hand, if the purchased apartment is the buyer’s only apartment and he is a foreign resident, then he is not entitled to the exemption or to lower purchase tax. Therefore, he will pay purchase tax at the tax brackets applying to the purchase of a second apartment.

Correct to date, there are two purchase tax brackets that apply to foreign resident purchasers of an apartment in Israel. 8% purchase tax will apply to the portion of the purchase price up to ILS 5,525,070 and 10% purchase tax will apply to any sum exceeding the first ILS 5,525,070.

Stages of Buying a Property in Israel

  1. Finding a property. Naturally, the first stage is finding the right property. For the most part, foreign residents tend to prefer location and proximity to the sea over proximity to good schools. The most efficient way to find a property is by engaging with a realtor. Before engaging with a realtor, it is important to ensure he has a valid real estate brokerage license and is fluent in English. As for the timing of payment of the realtor’s fee, the buyer must pay it shortly after signing the agreement, and not on the delivery date of possession of the apartment.
  2. Engaging with an Israeli attorney for representation during the sale transaction. Buying an apartment includes numerous stages and requires professionalism and attention to detail. This is especially true when the buyer is a foreign resident making a remote purchase. Furthermore, the process of buying a property by a foreign resident differs from the process applying to Israeli residents. As a result, it is important to engage with an Israeli attorney who has expertise in this field and experience working with foreign clients. The power of attorney the buyer issues to an Israeli attorney empowers that attorney to assume responsibility for managing all stages of the transaction. This includes from the negotiations stage until the final stage of registering the property under the buyer’s name at the Israel Land Registry. The buyer may decide if to come to Israel personally to sign the documents requiring certification during the transaction, or if to authorize his attorney to do so on his behalf. If the buyer chooses to empower his attorney to act on his behalf, the buyer must sign particular documents at a consulate or a notary public’s office. He must also obtain an apostille certification that legally validates these documents.

    If you are buying an apartment “on paper” from a contractor, it is extremely important to retain professionals during the negotiations stage. They will advise you on the apartment’s specifications, planning, and how to make modifications according to your needs. If you are buying a second-hand apartment, it is important to retain professionals for the purpose of conducting preliminary inspections. These include identifying deficiencies in the apartment and its various systems, examining the need for renovations, measuring the land, checking for building deviations, etc.

  1. Opening a bank account or trust account in Israel. The only way to pay a purchase tax bill for a property is through the buyer’s bank account. Therefore, it is very important to open a bank account in Israel. Since the opening of a bank account by a foreign resident is a lengthy process, you should begin this process early and before you sign the purchase agreement.
  2. Closing the transaction. The final stage in closing the transaction is delivering possession of the property against payment of the purchase price and reporting the transaction to the Real Estate Taxation Authority. Buyers do not usually pay the purchase price in a single payment. Attorneys devise payment mechanisms and pay in installments in order both to advance the transaction and to ensure the seller fulfills his obligations. For the most part, the attorney representing the buyer divides the total payment for the property into several stages and makes each payment contingent upon the seller fulfilling a particular obligation. The consideration clauses are critical in the agreement. This is especially true when a foreign resident is carrying out the purchase transaction, as this is not a standard transaction.
  3. Paying the taxes. Another key component of a real estate transaction is paying taxes. Purchase tax is the main tax imposed on a buyer of a property in Israel. This tax varies for Israeli citizens, foreign residents, new immigrants, returning residents, etc., according to the number of properties they own in Israel. Therefore, it is very important to understand which definition is most applicable and beneficial to you and then report this definition to the Real Estate Taxation Authority. Additionally, you must ensure all the details you report are indeed accurate and that you omit no detail when reporting the transaction. For example, if the buyer reports to the Real Estate Taxation Authority that he only has one apartment in Israel, but he actually owns more than one, he risks criminal punishment and the imposition of fines. The buyer must pay purchase tax no later than 60 days after the agreement signing date.
  4. Post-purchase. Once the transaction is complete, it is important to obtain an insurance policy to cover third-party, plumbing, and structural damages. It is also important to issue a perpetual power of attorney for management of the bank account and the apartment in the event of loss of legal competency. You should also draw up a will that solely addresses the bequeathing of properties in Israel.