The purchasing and the selling of real estate in Israel is fraught with legal difficulties owing to the particularly complex range of different land rights existing under Israeli law, real estate taxation and other technical pitfalls associated with this field.
The services of an experienced lawyer specializing in real estate law is essential in order to avoid becoming a “victim“ to professional negligence and/or losing substantial amounts of money when buying or selling property. It is interesting to note that some 75% of professional negligence suits against lawyers relate to real estate transactions!
THE PROCESS OF BUYING AND SELLING REAL ESTATE
In Israel, the usual process of the buying and selling of real estate is as follows:
Step 1: The parties negotiate to finalize all terms of the sale agreement including consideration, terms of payment, date of possession and the fittings and furniture included in the transaction (if any).
Step 2: Simultaneously with step 1 above, the checking of the land rights in and to the property and its registration, zoning, and the checking of the actual physical state of the property. It is strongly recommended to use the appropriate professionals at this stage such as lawyers and if necessary engineers and land assessors.
Step 3: The sale agreement is signed by the parties. Upon the signing of the agreement, part of the consideration is paid to the seller. Once some consideration has been paid by the purchaser to the seller, a cautionary note is registered in the Land Registration Office in favour of the purchaser to show that the purchaser now has an interest in the property. Within 40 days from the signing of the sale agreement, both parties are required to file the appropriate taxation documentation with the Land Tax Authorities (for further tax details see the section below on “Real Estate Taxation”).
Step 4: A mortgage may be obtained by the purchaser, if required (for further details see the section below on “Mortgages”).
Step 5: When the final payment is made to the seller, the purchaser is then able to take possession of the property. In most instances, part of the consideration will be held in trust by the seller’s lawyer pending receipt of all of the necessary documents required to register the purchaser’s rights with the relevant authorities, namely the Land Registration Office, or the Israel Lands Administration, or any other relevant body such as a settlement company.
Step 6: Actual registration takes place after all of the required documentation from the tax authorities, city council and other relevant authorities has been issued. The documents required for registration include:
- Tax clearances regarding payment or exemption from land appreciation tax, purchase tax and in some instances capital gains tax, property tax and payments to the Israel Land Authority.
- A clearance from the local authority stating that taxes and betterment tax has been paid.
- A Deed of Transfer of the rights has been signed by the purchaser and seller. This deed may also need to be signed by the Israel Land Authority depending on whether the land that was sold/purchased belonged to the Israel Land Authority.
- A Mortgage Deed duly signed by the purchaser and the bank (if applicable).
- Deeds cancelling any existing mortgages, encumbrances or caveats (if this has not been done at an earlier stage of the transaction).
- An Irrevocable Power of Attorney in favour of the Purchaser signed by the Seller.
- Depending on the nature of the land rights and with whom the land rights are registered, additional documentation may be required such as a declaration that no illegal building has been constructed.
TYPES OF LAND RIGHTS IN ISRAEL
Israeli law and precedent recognizes various land rights. The nature of these land rights determines the legal safeguards needed when selling or purchasing real estate in Israel.
Freehold Ownership
Only about 7% of land in Israel falls under this category! The owner of freehold land is registered in the Land Registration Office in the specific area in Israel where the land is located, as a free and exclusive owner of the land (subject to any encumbrances, caveats, easements, mortgages and so on) that may exist on the land.
Long Term Leases with the Israel Land Authority
Long term leases usually range from 49-98 years, often with an automatic renewal. In the event that a long-term lease has expired, it is necessary to renew it before you buy/sell the property. The renewal is sometimes at a substantial cost (for further details see the section below on “Capitalization”).
The majority of land in Israel falls under this category. The State of Israel owns 93% of the land, which is administrated by the Israel Lands Authority, which is the principle lessor of the land.
Short Term Renewable Leases with the Israel Land Authority
Short term renewable leases are prevalent in most agricultural land and co-operative settlements (in Hebrew known as a “kibbutz” or a “moshav”). In such instances, the individual holder of the land has no direct contract with the Lessor (the Israel Lands Authority sometimes in conjunction with the Jewish National Fund or the Jewish Agency). The terms of the short term renewable lease agreement are entered into between the agricultural settlement and the Israel Lands Authority directly. These agreements are usually renewed every 3 or 5 years.
The status of the individual landholder is one of a sub-licensee only. There is proposed legislation to “upgrade” these rights to those of long term leasehold.
It is interesting to note that many precedents today determine that these land rights do not form part of an estate that can be bequeathed by means of a will. Accordingly, in many cases, such rights can be inherited only according to the rules of preference laid down in the Succession Law.
The purchasing and selling of agricultural land is a highly specialized area and it is highly recommended that you use a law firm specializing in this area. Cohen Segelov & Co. Advocates and Notaries specialize in property law and in particular the purchasing and selling of agricultural land.
For further information see the section below on “Buying a Farm”.
Settlement Company (in Hebrew known as a “Hevra Meshakunit”)
A settlement company (in Hebrew known as a “Hevra Meshakunit”) is another complicated residential legal arrangement that exists in Israel and is prevalent in newly constructed or about to be constructed residential buildings.
The most common situation is where an apartment is purchased “from the plan“ (that is, the apartment has yet to be built) from the builder/developer/entrepreneur. In such instance, the builder/developer/entrepreneur has usually obtained the rights to construct the apartment building by way of tender from the Israel Land Authority and is obligated after construction, to register the building as a condominium apartment building. In this manner, each apartment will eventually be registered separately in the Land Registration Office as a long term lease with the owners being long term lessees from the Israel Land Authority and each apartment having its own sub-parcel number.
Purchasing an apartment in this framework involves lengthy contractual documentation with many appendixes. A thorough checking of the entrepreneur’s rights and the nature of the building to be constructed is required. In the interim between winning the tender and registering each condominium owner’s rights in the Land Registration Office, the entrepreneur acts as a “quasi” land registry so that any transactions regarding the property are done through the entrepreneur, usually in conjunction with the Israel Land Authority.
Selling an apartment of this nature during the above intermediate period also requires substantial documentation and verification of the rights involved particularly when mortgages are taken.
Rental of property
Rental for a period of up to 24 years and 11 months does not require registration at the Land Registration Office and is not considered as a “sale” of land rights. Rental for longer periods however, is considered by the tax authorities as a “sale” of land rights and where applicable taxes need to be paid (for further details see the section below on “Real Estate Taxation”) and registration of the transaction at the Land Registration Office is required.
ZONING AND BUILDING RIGHTS
Often purchasers and sellers of real estate discover only after signing the sale contract that the real estate being the subject of the sale does NOT meet the requirements of the zoning/building requirements (in most cases as a result of additions that have been constructed without licenses such as adding a room, closing a balcony, building a basement, construction of a loft and so on).
In some instances, complications arise where the intended use of the land by the purchaser does not match the zoning regulations, for example, the use of part of a house or garage for commercial purposes or an office, the use of farm land for commercial purposes, use of commercial property for residential purposes, and so on.
It is therefore imperative that diligent and thorough checks take place with the appropriate zoning authorities before the purchase/sale with the guidance of a competent lawyer in order to determine that all is in order and to avoid paying substantial levies/taxes and possible contractual damages to your seller/purchaser.
LETTER OF AGREEMENT ( known in Hebrew as “Zichron Devrim“)
Sometimes, a seller or purchaser under pressure from real estate agents or simply as the result of a desire to confirm that “the deal is done”, sign a Letter of Agreement (in Hebrew known as “Zichron Devrim”). A Letter of Agreement details a number of provisions and conditions that have been agreed between the parties relating to the proposed real estate transaction.
It is important to stress that a Letter of Agreement is a legally binding contract even though it may be only a few lines if it includes the following:
- the names of the parties;
- the consideration to be paid;
- the details of the property;
- the date of payment of the consideration; and
- the date of transfer of possession.
Since this document is a legal and binding agreement, either party can sue for the enforcement of the agreement. In addition, it is encumbering upon each party to file tax documentation within 40 days of the signing of this document.
Cohen Segelov & Co. Advocates and Notaries strongly advise our clients not to sign a Letter of Agreement as such a document more often than not lacks many accompanying details that still need to be agreed by the parties. Secondly, such documents are often signed without receiving essential professional advice relating to the nature of the land rights, zoning rights and so on and before thorough checks have taken place.
MORTGAGES
Israeli banks are conservative when providing loans for the purchase of real estate.
It should be noted that:
- the leverage rate is usually lower than what is supplied by overseas banks;
- the bank will require, in addition to the property to be mortgaged, additional security for the return of the loan, that is, the borrower must be in good financial standing and have an income. Usually the bank will only lend an amount where the monthly repayment is no more than 1/3 of a family’s net income.
Mortgage repayments vary from bank to bank and are highly competitive. Therefore, it is advisable to shop around before taking a mortgage. Recently, insurance companies in Israel began offering competitive mortgages. Cohen Segelov & Co. Advocates and Notaries can assist you in this matter.
The process of obtaining a mortgage is lengthy and involves substantial documentation. When a purchaser wishes to obtain a mortgage in order to finance his/her purchase, the seller is obligated to sign on certain documentation due to the fact that at the time of the receipt of the loan the seller is almost always still the registered owner of the property (see the above section- “The Process of Buying and Selling Real Estate”). Therefore, it is important for the seller to ensure that the above documentation will not prejudice his/her rights in the event that the contract is cancelled by either of the parties or the purchaser is unable to make meet his/her mortgage payments before the registration process is completed. A competent attorney can negotiate with the mortgage bank on his/her client’s behalf on some of the terms stated in the documentation to ensure that the seller is not prejudiced by registering a mortgage on behalf of the purchaser’s bank before the purchaser receives possession and ownership of the real estate.
SIGNING OF DOCUMENTS BY PARTIES NOT PRESENT IN ISRAEL
If either the seller or the purchaser is not physically present in Israel, the sale or purchase transaction can still take place by the overseas party signing the following required documentation at the Israeli consulate or before a notary whose signature is then authenticated by means of an Apostille seal in accordance with the Hague Convention. Depending on which country the overseas party resides in, the Apostille seal can be obtained from the Authentication Department of the Department of Foreign Affairs or from the local courts. Cohen Segelov & Co. Advocates and Notaries can advise you in regard to these matters.
It should be noted that the following documentation needs to be signed personally, and can’t be signed using a Power of Attorney:
- an initial General Power of Attorney to sell/purchase the property before the sale agreement is signed;
- an Irrevocable Power of Attorney to sell/purchase the property after the contract is signed in favor of the purchaser;
- Land Appreciation Tax Exemption Form by the seller if an exemption is being requested; and
- Various mortgage documents (depending on the mortgage bank).
In addition to the above, certified copies of the sellers/purchasers passport or identity book must be provided.
REAL ESTATE TAXATION
This is an extremely complex issue which can’t be comprehensively covered in this article and requires individual counsel according to the specific transaction.
Many factors need to be taken into consideration including: how many apartments have been purchased and/or sold by the seller/purchaser, was the apartment inherited or given as an inter-vivos gift, have previous exemptions been applied for on other properties in Israel and if so when and the nature of these exemptions, has anyone else in the immediate family (spouse and children under 18) purchased or sold an apartment and if so when.
On 29.7.2013, Regulation 76 of the Income Tax Law was introduced. This legislation significantly changed the taxation rates for both parties in a real estate transaction and is effective as from 1.1.2014.
The Seller
As from 1.1.2014, land appreciation tax is imposed at the rate of 25% on all apartments that are not exempt from the payment of land appreciation tax. If a seller is an Israeli resident who has not sold an apartment for 4 years prior to the current sale, the seller will be exempt from land appreciation tax on the first 4,000,000 million New Israeli Shekels (approximately). The seller is defined as the individual and his/her spouse and his/her children under the age of 18 years.
Land Appreciation tax is levied where an Israeli resident owns more than one apartment or if one is a foreign resident or Israeli citizen who resides overseas, unless the seller can prove that he/she doesn’t owns any real estate elsewhere in the world).
Land Appreciation Tax is levied according to the number of years that the property was owned by the seller at the rate of the real appreciation of the real estate less the costs involved in the purchasing and the selling of the real estate (such as legal fees, purchase tax, capitalization fees, real estate agent’s fees, land valuer’s fees, betterment tax and so on).
In addition, the seller may be liable for property tax, betterment tax to the local council and for capitalization tax or other levies/duties to the Israel Lands Administration.
The land appreciation tax exemptions on apartments that are inherited remain unchanged provided that the Deceased had only one apartment at the time of his/her death and that the Deceased would have been entitled to an exemption from Land Appreciation Tax.
The Purchaser
The current purchase tax rates for residential property for the period 16.1.2017-15.1.2018 are as follows (the percentage noted hereunder is a percentage of the consideration paid for the sale/purchase):
Up to 1,623,320 NIS = 0 %
From 1,623,320 NIS to 1,925,460 NIS = 3.5 %
From 1,925,460 NIS to 4,967,445= 5 %
From 4,967,445 NIS to 16,558,150 NIS =8%
Any sum over 16,558,150 = 10 %
If the purchaser has more than one apartment (or his wife or children under 18 have more than one apartment) then the current purchase tax rates for the period 16.1.2017-15.1.2018 are as follows:
Up to 4,967,445 NIS = 8 %
Any sum over 4,967,445 NIS = 10 %
It should be that in the event that the purchaser intends to sell his/her second apartment within 18 months of purchasing the current apartment, the tax rate for a single apartment may apply.
New immigrant purchase tax rates up to 15.1.2018 are as follows:
Up to 1,759,310 NIS = 0.5 %
Any sum over 1,759,310 NIS = 5 %
Purchase tax for property other than residential real estate (for example: land or commercial buildings) is 6% of the consideration.
Purchase tax for agricultural land forming part of a farm holding for the period ending 15.1.2018 is:
Up to 477,215 NIS = 0.5 %
Any sum over 477,215 = 5 %
For that portion of the farm constituting the residential house and immediate area surrounding it, the taxes are the same as for other residential housing.
It should be noted that the receiver of an inter-vivos gift of real estate is currently liable to pay purchase tax at a rate of 1/3 of the tax he/she would have paid if he/she had purchased the real estate. The only exception to the payment of the said purchase taxation is an inter-vivos gift between spouses currently living in the property being the subject matter of the gift.
Betterment Tax
Betterment tax is levied and paid to the local authorities in regard to the increase in the value of real estate that has occurred as a result of a change in zoning rights whether by a change of zoning itself (temporarily or permanently for example, from agricultural to residential) or by increasing the amount of meterage that can be built, for example, building an additional storey or a basement.
Betterment tax is set at a rate of 50% of the increase in the value of the land as a result of the above change. The said increase is determined by a written report from a land assessor representing the local authority. This assessment can be appealed within 30 days of its receipt by the seller. Recent amendments to the law have changed the manner in which an appeal can be filed. Cohen Segelov & Co. Advocates is indeed a well-known specialist firm in this area of law.
Capitalization (known in Hebrew as “Dmei Hivun”)
93% of the land in Israel is held by long term leaseholders who lease the land from the Israel Land Administration. Instead of paying a yearly rental, the Israel Land Authority capitalizes the payment for the full rental period (in Hebrew this payment is known as “dmei hivun”). The Israel Land Administration is in the process of capitalizing all residential properties that it rents as well as some of the individual farm holdings.
The capitalization payment is levied at percentage of the value of the land excluding the value of the buildings erected on the land and ranges from 5- 15% of the value of the land depending on the zoning rights of the land. In some cases, the capitalization amount levied can be appealed. Cohen Segelov & Co. Advocates is a well-known specialist firm in this area of law.
Tax planning
In the event that a real estate transaction will incur appreciation tax, capitalization or betterment tax, it is imperative to seek competent tax advice before the sale in order to explore the possibilities of minimizing the tax. Cohen Segelov & Co. Advocates and Notaries are experienced in this field and can assist you with your real estate tax planning.
Tax appeals
The seller and purchaser have a right to appeal any taxes or capitalization demanded by the relevant authority. Cohen Segelov & Co. Advocates and Notaries are experienced in this field and can assist you in the preparing documentations for the appeal and representing you at the appeal.
BUYING A FARM
Agricultural co-operative settlements (known in Hebrew as a “moshav”) comprise of approximately 80 individual farm holdings ranging from 24 – 120 dunams, that is, 6.5-30 acres. Although the prices of purchasing the rights to such holdings can be very expensive, the individual possessor of each farm holding usually doesn’t own the land; rather the land is owned by the state and managed by the Israel Land Authority who rents the land to the co-operative settlement. The co-operative settlement then allows the use of the specific land holding (farm) to the individual “landowner“ (see the section above- “Types of Land Rights in Israel“).
The purchaser needs to be Jewish, over the age of 18 and must live (in theory) on the farm. Furthermore, the sale of the farm is usually conditioned on the purchaser being accepted into the agricultural settlement after having undergone a graphology test and a personal interview.
The sale of the farm involves a multi-faceted and complex tax scenario. Land appreciation tax, capital gains tax, betterment tax, and fees to the Israel Lands Administration must be calculated and paid as a prerequisite for a transfer of the rights to the farm holding. In many cases the seller needs to either demolish some of the building that he has erected on the farm or pay considerable amounts of money to have it legalized since traditionally many farmers have over the years made various building additions without necessarily receiving the appropriate licenses which are needed from the local zoning authorities and the Israel Land Administration. Furthermore, some transactions are complicated by claims of the offspring of the farm holder who have themselves built their own houses on the farm holding and claim to have rights to the farm which can’t be sold without their permission.
Legal counsel from a lawyer who specializes in this field is necessary to avoid the many pitfalls involved in a transaction of this kind. Advocate Gidon Cohen of Cohen Segelov & Co. Advocates is indeed a well-known specialist in this area of law and he is in fact a farm holder and represents his agricultural settlement in the Local Regional Council.
Cohen Segelov & Co. Advocates and Notaries specialize in real estate law, sale and purchase of residential, commercial and agricultural land, rental, transfers without payment, inheritance issues, real estate taxation, real estate and asset management in Israel for overseas residents, vacation of tenants, property development and construction and all related issues.
Many of the English-speaking clients of Cohen Segelov & Co. Advocates and Notaries have chosen our services as we provide excellent and quality service in the English language.
Please don’t hesitate to contact us for further information.
Cohen Segelov & Co. Advocates and Notaries
Telephone: 972 3 613 4244
Fax: 972 3 6134245
Email: info@cslaw.co.il
A Boutique Firm
A Global Service
This article contains general information about legal matters. The information is not advice, and should not be treated as such. You must not rely on the information contained in this article as an alternative to legal advice from us. If you have any specific questions about any legal matter you should consult us directly. You should never delay seeking legal advice, disregard legal advice, or commence or discontinue any legal action because of information contained therein.
