Capital Gains Tax — What It Is and How to Calculate It | Attorney Rozil Amir

Capital Gains Tax — Definition and Purpose

Capital gains tax is a tax levied on the difference between the purchase price of a real estate asset (land or building) and its sale price. In other words, when you sell a property at a profit, the state participates in that gain through this tax. It is a direct tax charged when conducting a real estate transaction in Israel, and it has significant economic and legal implications for sellers.

The purpose of capital gains tax is to contribute to the state treasury while simultaneously limiting speculation in real estate. The tax is calculated on the basis of net profit — that is, after deducting sales expenses and related costs (such as attorney fees, title search fees, purchase tax paid previously, substantial improvements you made, and the like).

Who Pays Capital Gains Tax?

Any individual or entity selling a real estate asset in Israel is required to pay capital gains tax, unless entitled to a specific exemption. The law distinguishes between different types of sellers: private individuals, businesses, corporations, and developers. Each category may be subject to different rates or special conditions.

How Much Capital Gains Tax Must Be Paid?

The capital gains tax rate varies depending on multiple factors, primarily the holding period of the asset, the type of seller (individual or business), and whether it concerns a primary residence or an investment property. For example, the tax rate typically ranges from 10% to 50% of the gain, with longer holding periods providing lower rates.

Current Rates (2026)

• Primary residence, holding period up to 5 years: Tax rate of approximately 10% to 25% of the gain (depending on the exact year of holding).
• Primary residence, holding period over 5 years: Reduced tax rate, sometimes even partial or full exemption under certain conditions.
• Investment property or second residence: Higher rates, typically 25% to 50% of the gain.
• Commercial or industrial property: High rates, often 35% to 50%.
• Business seller (corporation): Tax rate generally higher than that of a private individual.

Important to note: The exact rates change over time in accordance with current tax laws and regulations. It is advisable to consult with a tax advisor or specialized attorney to determine the precise rate applicable to your specific case.

How is Capital Gains Tax Calculated?

Calculating capital gains tax requires several clear and precise steps. The basic formula is simple, but the details can be complex:

Basic Calculation Formula

Capital Gains Tax = (Sale Price − Purchase Price − Allowable Expenses) × Tax Rate

Where:

• Sale Price: The price at which you actually sold the property.
• Purchase Price: The price at which you purchased the property (actual price or assessed value, whichever is higher).
• Allowable Expenses: Costs that the state permits you to deduct from the gain, such as broker commissions, legal fees, property purchase tax paid previously, substantial improvements to the property, and more.
• Tax Rate: The percentage applied to the net profit, depending on the type of property and holding period.

Practical Example

Suppose you purchased an apartment for 800,000 shekels and made improvements totaling 50,000 shekels. After 7 years, you sold the apartment for 1,200,000 shekels. Sale costs (lawyer, broker, etc.) amounted to 30,000 shekels.

Calculation:

• Sale Price: 1,200,000 shekels
• Purchase Price: 800,000 shekels
• Improvements: 50,000 shekels
• Sale Expenses: 30,000 shekels
• Capital Gains Tax Base: 1,200,000 − 800,000 − 50,000 − 30,000 = 320,000 shekels (net gain)
• Assuming the tax rate is 20% (for example, for a primary residence with a holding period of 7 years): 320,000 × 20% = 64,000 shekels

In this case, the capital gains tax you must pay is 64,000 shekels.

Capital Gains Tax Exemptions and Relief

The law permits several exemptions and relief in certain conditions:

Primary Residence

An apartment that was your primary residence is entitled to special treatment. If you held it for an extended period (generally 5 years or more), you may be entitled to a full exemption or significant relief. This depends on the years of ownership and additional conditions.

Full Exemption Under Certain Conditions

In special cases, such as sale of a property due to essential reasons (economic hardship, health issues, emigration), you may apply for a full or partial exemption. This requires clear documentation and approval from tax authorities.

Properties Located in Certain Areas

Properties in areas where the state wishes to encourage settlement may be entitled to an exemption or relief in capital gains tax.

Sale Following Business or Company Liquidation

Under certain conditions, sale of a property following closure of a business may be subject to special treatment.

Permitted Deductions from Capital Gains

To calculate capital gains tax accurately, it is important to understand the expenses that the law allows you to deduct. These expenses reduce the tax base and thereby decrease the amount you must pay:

• Brokerage Commission: If you hired a broker, their commission is permitted to be deducted (usually up to 3% of the price).
• Attorney Fees: Legal costs related to the sale.
• Acquisition Tax Previously Paid: If you paid acquisition tax when purchasing the property, it can be deducted.
• Substantial Improvements: Investments you made in the property (renovations, expansion, system upgrades) — provided there is clear documentation.
• Inspection and Insurance Costs: Property registry inspections, third-party insurance, and similar expenses.
• Taxes and Government Fees: Property registry registration costs and update fees.

It is important to keep all receipts and invoices, as they serve as evidence when calculating the tax.

The Difference Between Capital Gains Tax and Acquisition Tax

Many people confuse capital gains tax with acquisition tax. These are two completely different taxes:

• Acquisition Tax: Paid by the buyer when purchasing the property. Its rate depends on the property value and the purpose of purchase (first residential apartment, investment, etc.). It is a one-time tax upon purchase.
• Capital Gains Tax: Paid by the seller when selling the property. It applies to the profit only, not the entire sale price. It is a tax on profit, not on the purchase.

In a single real estate transaction, both taxes can appear: the seller pays capital gains tax, and the buyer pays acquisition tax.

Smart Planning and Legal Advice

Capital gains tax can be very significant, and in some cases it can be approximately 50% of the profit or even more. Therefore, proper planning before selling is critical. If you are planning to sell a property, it is important to:

• Consult with a Tax Advisor: To understand the precise tax impact on your specific case.
• Document Expenses: Keep all receipts and invoices for improvements and expenses to reduce the tax base.
• Check for Exemptions: If you are entitled to an exemption (first residential apartment, special conditions), verify the conditions in time.
• Plan the Timing: The holding period affects the tax rate — a longer holding period may result in a lower rate.
• Obtain Legal Advice: A specialized attorney can help you navigate the process and ensure you pay only the legal tax owed.

As a boutique law firm specializing in real estate law, we provide personalized and professional advice at every stage of the sales process, including accurate calculation of capital gains tax and strategic planning to minimize the tax impact.

Comparative Table: Capital Gains Tax in Various Scenarios

Note: The figures in the table are estimated and for demonstration purposes only. Actual rates depend on current tax laws, accurate property data, and tax authority decisions. Consult a tax advisor or attorney before any transaction.

Why Legal Advice on Capital Gains Tax Matters

Capital gains tax is one of the most complex issues in real estate law in Israel. It combines tax laws, tax authority interpretations, special conditions, and exemptions that can be difficult to understand without experience. An expert attorney can:

• Calculate the tax accurately and identify expenses you may have missed.
• Check if you are entitled to an exemption or relief.
• Plan the sale in a way that minimizes the tax impact.
• Represent you before the tax authorities if there are questions or disputes.
• Ensure all documents are prepared properly and all legal requirements are met.

As a boutique law firm specializing in real estate law in Israel, we help individuals and families understand capital gains tax, plan their sale wisely, and ensure they pay only the legal tax owed. We provide personal, discreet, and professional advice at every stage of the process.