Capital Gains Tax Exemption on the Sale of a Single Apartment

The Real Estate Taxation Law (the capital gains tax law) provides that an Israeli resident who sells their only apartment is entitled to an exemption from capital gains tax, provided that the apartment being sold is the seller's only apartment, the seller has held the rights in the apartment for at least 18 months (for a new apartment, the 18-month holding period is counted from the date the occupancy permit, "Form 4", was issued), and the seller has not sold another residential apartment under this exemption during the 18 months preceding the sale.

Where the sale price exceeds NIS 4,500,000, or where the sale price is affected by unused building rights, a full capital gains tax exemption will not be granted, even if it is a single apartment. In these cases, a partial exemption from capital gains tax may be obtained under the conditions set out in the law, and the balance is subject to capital gains tax.

As mentioned, there are cases in which the capital gains tax law treats the seller as owning only one apartment, and therefore entitled to the capital gains tax exemption, even if the seller owns more than one apartment at the time of the sale.

Cases in which owning more than one apartment still allows a capital gains tax exemption

1. Upgrading your home (moving to a better home) - A person owns an apartment and wants to move (usually to upgrade their housing, although the law does not require an upgrade). That person buys a residential apartment before selling the apartment they own. In this case, at the time of selling their apartment, the person holds two apartments (the old one and the new one). In such a situation, the seller is entitled to a capital gains tax exemption on the sale of the old apartment, provided that the new apartment was purchased as a replacement for the old apartment within the 24 months preceding the sale of the old apartment. It is important to note that when filing the declaration on the purchase of the new apartment, you must state your intention to sell the old apartment.

2. An apartment rented to a protected tenant (a tenancy under the Tenant Protection Law) - A seller who owns 2 residential apartments, one of which was rented under a protected tenancy before 01/01/1997, will be entitled to a capital gains tax exemption on the sale of the apartment that was not rented under a protected tenancy.

3. A share in an apartment - Where a person owns a residential apartment and also owns up to one third of another apartment, that person may sell the whole apartment exempt from capital gains tax. Note: suppose a person owns an apartment and one third of another apartment. On the sale of the apartment owned entirely by the seller, there is a capital gains tax exemption. If the seller first sells the one-third share, there is no capital gains tax exemption. The order of the sales is therefore critical.

4. A share in an apartment received by inheritance - Where a person owns a residential apartment and also owns up to half of another apartment that was received by inheritance, that person may sell the whole apartment exempt from capital gains tax. Note: suppose a person owns an apartment and half of another apartment received by inheritance. On the sale of the apartment owned entirely by the seller, there is a capital gains tax exemption. If the seller first sells the half share, there is no capital gains tax exemption. The order of the sales is therefore critical.

5. An apartment received by inheritance - Where a person owns an apartment and has inherited an additional apartment from their spouse, or from their own or their spouse's parents or grandparents, the seller may sell their own apartment (the one that was not inherited), provided that before their death the person who bequeathed the apartment owned only one residential apartment.

6. Selling two apartments in order to buy one apartment - A person who owns two residential apartments may sell both of them exempt from capital gains tax, provided that the second apartment is sold within one year of the sale of the first apartment, the total sale price of the two apartments does not exceed NIS 1,986,000, and, in addition, the seller purchased one apartment at a price of at least 75% of the proceeds from the sale of both apartments, with the purchase made within the year before or the year after the sale of the second apartment.

Cases in which the sale of a single apartment is not exempt from capital gains tax

There are also the opposite cases, in which the seller believes they own only one apartment, and after the sale it turns out that they are not entitled to the capital gains tax exemption and the sale is subject to capital gains tax. Here are a few examples:

1. The family unit owns another apartment - The family unit consists of the spouses and children under 18. The family unit is treated as a single unit, so that if the husband sells an apartment while the wife owns another apartment (assuming there is no separation of property between the spouses), or the minor children own an apartment that does not meet the conditions detailed above, the sale of the apartment will not be exempt and will be subject to capital gains tax.

2. Holding an apartment through a company - A seller who holds shares in a company (not necessarily a real estate association) that owns a residential apartment used or intended for residence, in addition to a residential apartment owned personally, will be treated as holding two apartments and will therefore not be entitled to a capital gains tax exemption on the sale of their personal residential apartment. For the company's apartment to be treated as the seller's apartment, so that the seller holds two apartments, the seller must hold more than 33% of the company's shares, and if the shares were received by inheritance, the holding must exceed 50%. On a sale of the apartment by the company, there is in any event no capital gains tax exemption, since the exemption is granted to individuals only. This provision is meant to prevent a situation in which the owner of two apartments transfers one apartment to a company under their control and is thus left with only one apartment for the purpose of obtaining the capital gains tax exemption.