Appreciation Tax Exemption for a Foreign Resident: The Condition That Defeats Most Claims
A foreign resident selling a residential apartment in Israel does not receive the exemption on the same terms as an Israeli resident. The law adds one condition, and it is the one that defeats most claims: proving that he holds no residential apartment in the country where he is resident. This guide sets out the condition, what to do when the foreign tax authority issues no certificate, and what other routes sit alongside it.
Appreciation tax in brief
Appreciation tax is charged on the gain arising on the sale of a right in land, that is on the difference between the acquisition value and the sale value, after the deductions the law allows. For an individual the rate on the real appreciation is 25 percent. On a residential apartment the sums are usually substantial, which is why the exemption is not a technical question but the central financial question in the transaction.
The exemption is not the only thing to examine. Even where there is no entitlement to a full exemption, the tax actually payable can be materially lower than it first appears, because of other calculation routes and because of deductions. The calculation therefore belongs before the decision to sell, not after an agreement has been signed.
Who counts as a foreign resident
The definition does not follow from a passport, and it does not follow from where a person is registered. It rests on the definition in the Income Tax Ordinance, and its core is the centre of life test: where the home, the family, the occupation and the economic interests are, alongside tests based on days of presence.
The practical consequence matters: the classification itself is often the first point of dispute, before the question of the exemption is reached at all. Someone who has left Israel and is unsure of his status, and someone who has returned to it, should establish his status for the year of sale before relying on any route.
The condition that applies only to them
A foreign resident carries one further condition that does not apply to an Israeli resident: to obtain the exemption on the sale of a residential apartment, he must prove that he holds no residential apartment in the country where he is resident.
Proof is made by way of a certificate from the tax authorities of the country of residence. The logic behind the condition is plain: someone who already holds a residential apartment in the country where he lives will not receive in Israel the relief intended for a person with a single apartment.
This is the condition that defeats most claims, and usually not because the seller fails to meet it. In many countries the tax authority simply does not issue such a certificate, and keeps no register from which one could be produced. What is done then is the subject of the next section.
When no certificate is issued
The Tax Authority recognised the difficulty and laid down an alternative procedure, in Addendum 2 to Land Taxation Implementation Instruction 5/2013. The idea is that the fact may be proved by objective evidence, to the satisfaction of the director. These are the items the procedure speaks of:
- Identifying where the seller actually lives and on what footing. Not only where he lives, but in what capacity he lives there.
- A lease, or any other document showing that the seller is a tenant and not an owner.
- Confirmation of municipal tax paid abroad, so far as it can be obtained, showing that payment was made as a tenant rather than as an owner.
- A copy of the return filed with the foreign tax authority, showing that the seller has no income from letting an apartment he owns.
- A certificate from the accountant who represents the seller abroad.
- A signed affidavit by the seller, declaring that he owns no residential apartment in the country of residence.
Two things worth knowing about this route. First, it is a procedure and not a right, and the question of satisfaction is left to the director. Second, it is preparatory work that takes time, because some of the documents come from abroad and sometimes require translation and authentication. Collection starts before a completion date is fixed, not after.
Other routes
The exemption is not the only way through, and at times it is not the best one:
- The linear calculation. On a qualifying residential apartment acquired before 1 January 2014, the proportion of the appreciation accrued up to that date is exempt and the balance is taxed. In many cases the outcome comes close to a full exemption. This is an arithmetic check on the numbers in the particular file, not a matter of principle.
- An apartment received by inheritance. There is a separate exemption route for an inherited apartment, and its conditions differ from those of the single apartment exemption.
And on an inherited apartment there is a point to know in advance. The Tax Authority position is that a foreign resident heir is not entitled to the inherited apartment exemption, because the condition is examined in the seller rather than in the deceased. That position changed an earlier practice at the assessment offices, and it is disputed. Anyone planning to rely on an inheritance exemption as a foreign resident should establish the position before signing rather than after.
Mistakes that repeat
- Relying on the exemption without checking it. The agreement is signed, and only then does it emerge that there is no certificate and no alternative evidence.
- Assuming a passport decides it. Residence is fixed by the centre of life, not by citizenship and not by where documents were issued.
- Confusing appreciation tax with purchase tax. The exemption on this page concerns a sale. On a purchase, a foreign resident does not receive the reduced purchase tax brackets for a single apartment, which is an entirely separate question.
- Forgetting that the sale also concerns the country of residence. A tax treaty can prevent double taxation, but it does not remove the duty to report there.
- Starting to collect documents after signing. A document that comes from a foreign authority, translated and authenticated, is not a matter of a day.
What makes it possible to say something real in a first conversation, rather than to estimate: a current registry extract, the original purchase agreement or deed, and details of where the seller lives abroad and on what footing.
Every case is examined on its own facts. For a consultation with a lawyer from the real estate department call 02-5953322, send a WhatsApp message to 050-4411343 or leave your details in the form below, and we will get back to you as soon as possible.
What people ask most often
I am an Israeli citizen living abroad. Am I a foreign resident?
The tax authority where I live does not issue such a certificate. Is there no chance?
I inherited an apartment in Israel and I live abroad. Am I entitled to the exemption?
And if there is no exemption, how much tax is payable?
When should this be dealt with?
All Real Estate Department pages
Before you sign a sale from abroad
Tell us where you live and on what footing, when the apartment was acquired, and whether it came by inheritance. Those three settle which route is in play at all, and what should start being collected now.