Capital Gains Tax – Linear Rate

Israel’s Capital Gains Tax (Hebrew: Mas Shevach) is a tax imposed by the state on real estate sellers for the profit gained from selling property. The law provides an exemption from Betterment Tax under certain conditions up to a ceiling of approximately 5 million NIS. This means that if a seller owns more than one residential property, he/she may be required to pay Capital Gains Tax when selling a property in Israel other than their primary residence, but only on the profit earned, not the entire sale amount.

Linear Tax Rate

Before 2014, sellers could receive an exemption from Capital Gains Tax every four years when selling a residential property. However, starting January 1, 2014, a benefit called “Linear Tax Rate” was introduced. This benefit exempts sellers from Capital Gains Tax for the period up until the beginning of 2014, while profit from 2014 onwards is subject to Capital Gains Tax as per the law.

For instance, if someone decides in 2024 to sell a property they acquired in 1994, they will only pay 1/3 of the Capital Gains Tax. This is because the tax is calculated over 30 years but is only applicable to profits earned over 10 years, potentially amounting to hundreds of thousands of shekels.

Reducing Capital Gains Tax

Capital Gains Tax can be reduced through expenses intended to increase the property’s value, such as legal fees for purchasing or selling the property, purchase tax paid at the time of acquisition, fees for brokers and appraisers and lawyers at the time of purchase and sale, Betterment Tax paid on the sale to the municipality, interest paid on the mortgage throughout ownership, and more.

Cancellation of Linear Tax Rate = Sale of Old Apartments for Immediate Investment

On January 16, 2024, a taxation law (betterment and purchase) (amendment) for the year 2024 was published, in which Israel’s Ministry of Finance is requesting a gradual cancellation of the benefit in the form of the Linear Tax Rate starting in 2026. 

This means that any property sale until the end of 2025 will benefit from a relative exemption from Capital Gains Tax until the end of 2013. For property sales in 2026, a 5% tax will apply to the profit accumulated until 2014, with an additional 5% each subsequent year until the linear beneficial calculation is completely abolished by January 2030.

According to the Israeli Ministry of Finance, the Linear Tax Rate does not encourage investors to sell their properties, thereby affecting housing supply and contributing to rising property prices. Furthermore, the claim is that most beneficiaries of this tax benefit own investment properties in high-demand areas in the center of the country.

Therefore, to encourage additional housing units entering the market and to equalize the tax burden on property sellers for investment purposes, regardless of when the properties were purchased, the law proposes a phased cancellation of the Linear Tax Rate calculation from 2026 until its complete abolition in 2030.