VAT on Real Estate Transactions and Urban Renewal

VAT applies to real estate transactions when a dealer (osek) sells property in the course of business, and also when a non-dealer sells real estate to a dealer (the definitions of "transaction" and "casual transaction" in Section 1 of the VAT Law). In urban renewal projects, the developer provides construction services to the residents, which are subject to zero-rate VAT under the conditions set forth in Sections 31A and 31B of the Law. Many disputes concern the deduction of input tax on the project and public obligations.

Send us the agreement or the VAT director's letter, and we will review what applies to the transaction.

Usually before signing an agreement, or when the VAT director disputes the reported filing:

• You are a developer in a Pinui Binui or TAMA 38 project, and the VAT director disputes the zero rate you reported on construction services provided to residents.

• The VAT director disallowed your input tax deduction on expenses you paid on behalf of the residents, such as their attorney's fees.

• The municipality requires you to build a public facility or parking structure, and the VAT director claims this constitutes a service to the municipality.

• You are registered as a dealer, have been leasing a property for years, and are about to sell it.

• You are selling a building in which some apartments are leased under protected tenancy, or residential apartments in a building that also contains commercial units.

The capital gains tax and purchase tax on these transactions are explained on the page Taxation of Combination Deals, Pinui Binui and TAMA 38.

VAT applies to the sale of real estate by a dealer in the course of business, while the law also provides exemptions and zero rates. These are the main rules.

Who Is Liable for Tax on a Property Sale

• A "transaction" is a sale of property by a dealer in the course of business, as well as a sale of property in respect of whose acquisition input tax was deducted (Section 1 of the Law). "Real estate" also includes an interest in a real estate association (igud mekarkein).

• A person whose business is not the sale of real estate and who sells real estate to a dealer carries out a "casual transaction." The same applies to a sale to a non-profit organization (malkar) or a financial institution, except for the sale of a residential apartment. The tax is paid by the buyer, and a buyer who is a dealer issues a self-invoice (Regulation 6B of the VAT Regulations).

Exemptions

• Residential leasing for a period of up to 25 years is exempt (Section 31(1)). Leasing under protected tenancy pursuant to the Tenant Protection Law, and the sale of real estate so leased, are also exempt (Section 31(2)).

• The sale of property in respect of which input tax could not be deducted at the time of its acquisition is exempt (Section 31(4)).

• Input tax may be deducted only on inputs for a taxable transaction (Section 41). In a project that also includes exempt transactions, the inputs are apportioned, and the apportionment method is frequently disputed.

Combination Deals, Pinui Binui and TAMA 38

• When the consideration is not in cash — for example, apartments the developer builds for the landowner — the transaction price is the price that would have been paid for it under normal conditions (Section 10).

• In Pinui Binui, zero-rate VAT applies to the sale of the replacement apartment and to the construction services the developer provides in the complex, in consideration for an apartment acquired from a resident pursuant to Section 49KK of the Real Estate Taxation Law, up to the value ceiling (Section 31A(b)).

• In TAMA 38, zero-rate VAT applies to construction services provided under the reinforcement plan, in consideration for a right sold under the exemption pursuant to Sections 49LG or 49LG1 of the Real Estate Taxation Law (Section 31B(b)). This is a temporary provision, effective until December 31, 2033.

• Until Amendment 47 to the Law (November 25, 2014), these services were exempt. The amendment replaced the exemption with a zero rate, enabling the developer to deduct input tax, and it applies to transactions whose tax liability date falls on or after its publication date. Consequently, the tax liability date is often the central issue in dispute.

1. You send us the agreements (with the residents, the landowner, or the buyer), the building permit, and the correspondence with the VAT director.

2. We map the transactions in the project: what is fully taxable, what is zero-rated, what is exempt, and when the tax liability date falls.

3. We review the input apportionment and the reported values, and prepare an alternative calculation to that of the VAT director.

4. Before a Pinui Binui transaction, it is possible to request advance approval from the VAT director and the Real Estate Taxation director (Section 49KA(c) of the Real Estate Taxation Law), and in other transactions a tax ruling. After an assessment is issued, we file an objection to the VAT assessment within 30 days, and proceed to appeal before the District Court if necessary.

Six District Court rulings in cases in which Adv. Shlomi Vaknin represented the taxpayer.

Neve Gad: Input Tax Deduction in Pinui Binui, TA 53560-11-21 (November 9, 2023)

A Pinui Binui developer deducted the tax on the invoice of the residents' attorney, and the court allowed the deduction. On the remaining issues the appeal was dismissed: the tax on services to the residents in Phase 2 was triggered upon receipt of the consideration, and at the latest when the developer entered the site, and therefore Amendment 47 did not apply; and the inputs are apportioned by area ratio rather than the income ratio the company had used. The company was ordered to pay costs of NIS 90,000. Adv. Shlomi Vaknin represented Neve Gad. The VAT director's appeal to the Supreme Court (CA 914/24) is pending, and our firm represents the company in that appeal. The Neve Gad ruling.

Aura: Public Obligations, TA 62970-03-22 (February 13, 2025)

The VAT director assessed a developer for tax on the construction of a public building, renovation of a school, and reconstruction of a parking structure and kindergartens. The court held that these constitute services to the municipality, but that an occupancy permit and areas received through land consolidation and redistribution do not constitute consideration. The VAT on the parking structure was reduced from NIS 4,203,927 to NIS 1,799,875, and the kindergartens were calculated according to the company's computation. The appeal was partially allowed. Advs. Shlomi Vaknin and Ariel Epstein represented Aura. Appeals against the ruling have been filed with the Supreme Court (CA 45772-12-25) and are pending. The Aura ruling.

Sale of Property: Business or Passive Leasing

• Navok and Glazer, TA 447-09-14 (May 5, 2016): Two partners registered as a dealer sold a property in Tel Aviv in 2010 that they had leased for years. It was held that this was passive leasing and the sale did not constitute a transaction. The appeal was allowed. Adv. Shlomi Vaknin represented the appellants. The ruling.

• I.P.F., TA 10304-07-14 (January 16, 2017): The sale of residential apartments that had been leased for approximately six years, in a Tel Aviv building that also has a commercial section, was held to be exempt under Section 31(4). The appeal was allowed. Adv. Shlomi Vaknin represented the company. The ruling.

• Kargad, TA 15676-01-14 (November 16, 2016): The sale of a building in Ramat Gan was held to be a transaction, but the building rights did not negate the exemption under Section 31(2), which was calculated based on the area of the five protected-tenancy apartments. The sixth apartment and the storage unit were subject to tax. The appeal was partially allowed, mostly in the company's favor. Adv. Shlomi Vaknin represented Kargad. The ruling.

A.Tz.I Real Estate: Future Building Rights, TA 68651-05-22 (May 9, 2024)

A company and its shareholders purchased real estate together and agreed in advance that the future building rights would belong to the shareholders. The court held that no additional transaction had taken place between them, and that in any event the assessment was time-barred. The assessment, NIS 1,480,805 in principal tax, was annulled, and the company was awarded costs of NIS 95,000. Advs. Shlomi Vaknin and Ariel Epstein represented the company. The A.Tz.I Real Estate ruling.

The practice is led by Adv. and CPA Shlomi Vaknin together with his firm's team. He served for nearly a decade as a national supervisor in the Professional Division of VAT at the Israel Tax Authority headquarters.