By Shia Getter

Real estate pricing in central Israel has been a prime source of concern in Israeli discourse over the past few years. Whether or not the government truly wants prices to drop is a discussion in itself, but Israeli citizens certainly want to bring prices down. Jerusalem prices are actually not sky-high relative to other capital cities in high demand, but Tel Aviv does make it to the “top twenty” global list.

Minister of Finance Yair Lapid’s new law is supposed to be the beginning of a solution: as of September 1st the government will stop charging VAT to new homeowners.

Value Added Tax in Israel is 18% and is added to many products and services, including construction materials and a finished home sold by a developer company. When buying a home, the VAT is included in the final price quoted to the buyer, so cutting out that tax would translate into a 15.5% reduction from the final market price.

To some, such a step seems obvious if the goal is to help Israeli families own their homes. In fact, the basic idea has been brought up before.

And yet, responses to the new law, from economists, legal experts, and real estate entrepreneurs, have been mixed. While many commend the attempt, nobody seems quite sure whether this particular implementation of the idea – which would grant the benefit to only a percent of the population choosing from a very limited supply of apartments – will be helpful, harmful, or completely ineffective. This article will take a closer look at the details, and my next article will discuss the pros and cons.

Let’s understand Lapid’s plan. First of all, the law talks about 0% VAT, as opposed to VAT free. The differentiation has no bearing on the buyers, who, either way would pay no VAT. However, a business – in this case the developer company – pays VAT on their materials and expenses. When the buyer pays VAT on the apartment, the developer transfers that tax to the authorities, subtracting the value of all the VAT they paid out for the construction materials. So keeping real estate within the realm of VAT transactions, as opposed to VAT free, means the developers can still be refunded by the government for the large amount of VAT they themselves paid.

This leads to a complication that arises when the apartment is not bought from a developer company, but through a buyers group. A buyers group is not a company – the buyers split the costs of materials between themselves and have no way of getting a VAT refund. This law would make it 15.5% less worthwhile for those buyers who are eligible for the proposed benefit to join a buyers group.

Who is eligible:

The benefit would not apply to buyers across the board, but to a specific cut of the population as yet not completely defined, but basically, couples with children or singles over 35 years old buying their first apartment, and divorced couples even if they previously owned an apartment together.

The buyers cannot be buying as an investment, either. If the apartment is sold within five years, they will retroactively owe VAT. This prevents the young couple from simply acting as a façade for investors.

Which apartments are eligible:

The apartment has to be bought from a developer, and the developer will have to keep his apartments at 95% of the average market price for that area, as set by a government assessor. This assumes developers will prefer more sales at a slightly lower price, and is a preventative measure against the concern of many economists, that developers will simply raise their prices, turning much of the 0% VAT into their own profit.

Apartment prices per meter per area will be published on government sites and the media.

Furthermore, the full price of the apartment cannot exceed NIS 1.6 million. For couples and individuals who have not served in the army or sherut leumi, the apartment’s value cannot exceed NIS 950,000.

The law seems to discriminate against previously-owned apartments, but actually, such apartments are generally sold by private owners, so there is no VAT involved to begin with.

How would a potential buyer prove they are eligible?

Eligible buyers would have to go to an office, set up specifically for this purpose, and prove they are: married with a child (or over 35), not a home owner, and note whether they or their spouse has served in the army or sherut leumi. The buyer(s) would also sign an agreement not to sell the apartment within five years.

No one will inquire into the source of financing; couples benefiting from parental help will still be eligible for the benefit.

Will it work?

That depends on supply. At this point, many buyers who might be eligible for the potential discount are holding off their purchase; they are waiting and monitoring the progress of the law. When the benefit begins to apply – which is supposed to be September 1st, but which may actually take a few months longer – there will be way more ready buyers than there are apartments. Even with the highly regulated price control on eligible apartments, real estate experts expect a jump in price.

 

Shia Getter is the CEO of the Shia Getter Group, a full-range real estate services firm in Jerusalem catering to the Anglo investor. He is a noted expert, columnist, and author of The Guide to Investing in Jerusalem Real Estate. He and his professional team manage many upscale Jerusalem properties and have helped countless people buy, sell, and renovate property in Israel. Look out for more of his articles in the coming weeks.

 

This article is intended to provide general information about the subject matter covered. It is not meant to provide legal opinions, offer advice, or serve as a substitute for advice by licensed, legal professionals. This article is published with the understanding that the author or publisher is not engaged in rendering legal or other professional services.

The author does not warrant that the information is complete or accurate, and does not assume and hereby disclaims any liability to any person for any loss or damage caused by errors, inaccuracies or omissions, or usage of this article.

Laws and interpretations of those laws change frequently and the subject matter of this article has important legal consequences. If not understood, legal, tax, or other counsel should be consulted.

This article is intended to provide general information about the subject matter covered. It is not meant to provide legal opinions, offer advice, or serve as a substitute for advice by licensed, legal professionals. This article is published with the understanding that the author or publisher is not engaged in rendering legal or other professional services.

 The author does not warrant that the information is complete or accurate, and does not assume and hereby disclaims any liability to any person for any loss or damage caused by errors, inaccuracies or omissions, or usage of this article.

 Laws and interpretations of those laws change frequently and the subject matter of this article has important legal consequences. If not understood, legal, tax, or other counsel should be consulted.