7 Hidden Costs When Buying an Apartment in Israel – Part One

7 Hidden Costs When Buying an Apartment in Israel – Part One

What’s Not Included?

Congratulations, you have just found the apartment of your dreams. Your agent showed you an apartment you love; you negotiated and agreed on a price that seems to meet your expectations. Is it a done deal? Definitely not, the buying process has just begun.

Buying an asset in Israel includes many hidden costs that can significantly increase the cost of the transaction, sometimes to an extent that questions the entire deal. Often, the sales agent will be happy to give the impressions that these costs are negligible, but they can amount to large sums of money. It is recommended to prepare in advance towards these hidden costs. This is a two part article that walks you through these so called “hidden” costs. Part one discusses purchasing tax and the Israeli Construction Cost Index. Let’s get started.

Purchasing Tax

Purchasing tax is mandatory for anyone purchasing a real estate asset in Israel. The tax is imposed on the transaction, and disregards any profit that may or may not occur as a result of the transaction. The payment is due within 50 days of agreement signing. Notice it’s not the closing date, but the signing date of the agreement. As a rule of thumb the tax rate is 8% of the proceeds (in case of an apartment). However, when it comes to transactions on apartment purchasing there are different tax brackets that are related to these three variables:

  1. Is the purchased apartment the buyer’s first residential apartment in Israel?
  2. Is the buyer an Israeli resident for tax purposes?
  3. What is the price of the apartment?

Given the purchaser of the apartment is an Israeli resident for tax purposes, the acquired property is his first residential apartment and the price of the apartment price does not exceed 1,600,175 NIS the purchase tax is 0%. Or in other words: he’s exempt from this tax. Every shekel above this amount and up to 1,898,005 NIS, will be charged a purchase tax of 3.5% and 5% of the remainder and from 4,896,615 – 8%. Tax rates continue to rise according to proceeds.

Given the buyer of the apartment is not an Israeli resident for tax purposes and/or it is not his first apartment, the deal is taxed at a rate of 8% from the first shekel. As you can see, the purchase tax can amount to tens of thousands of dollars, therefore it should be taken it into account and prepare to it in advance.

A client purchased an apartment for 3,000,000 NIS at purchase she was required to pay 240,000 NIS purchase tax. In practice she was planning to make Aliyah and move to Israel. This of course reduced her purchase tax to 65,524 NIS. A lawyer who’s familiar with real estate taxing will reduce your tax to the minimum required.

Israeli Construction Cost Index

This cost only applies to new apartments purchased from a contractor or a buying group. The apartment purchase’s outstanding balance is linked to the Israeli Construction Cost Index, designed to reflect the price changes of construction materials in Israel.

In reality this Index Price is just a means for additional profit on the buyer’s expense. In Israel today a significant percentage of the purchasing price is affected from the price of the land and not from the construction costs of materials. The price of the land does not change according to costs of construction materials. But in reality this is part of the business norm in Israeli real estate market and there is not much one can do to avoid this expense, but it is important to prepared for it in advance.

During the past five years, the index price rose by 10% in total, as shown in the graph below:

Photo: Courtesy of Bizportal

This means that apartment prices go up according to this index price. Do not think that if the CPI drops, you will pay less! Contractor agreements usually state that in the case the index price drops in the value is paid nominally. As a side note this is just one example for how asset purchasing agreements in Israel tend to be one sided clearly representing the seller’s best interests.

You have just been introduced to 2 major expenses related to buying an apartment in Israel. In the second part of the article I will introduce additional expenses that are not always taken into account, so please stay tuned.

Comments and questions are welcome, as always, in the comment section below. 

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