An agricultural estate transaction is usually more complex than an ordinary land transactions, since a person who owns an agricultural estate holds several different rights to which he sells to the buyer – each of these rights has a different tax impact.
For inheritance, it is customary to divide the bundle of rights into five separate rights entities:
- The residences and/or existing residential buildings on the estate.
- Remaining residential building rights.
- Remaining residential plots that allow for the establishment of non-agricultural business activities (e.g., hotels, factories, store fronts, etc.).
- Agricultural land associated with the estate.
- Seller rights with the Moshav’s Community Association.
The agreed consideration between the parties is generally provided for all the rights in case of inheritance – but for a sales transaction, the manner in which consideration is attributed is of great significance for all matters relating to taxes that apply to both the buyer and seller.
In view of the difficulty in holding individual segments of an agricultural plot (due to Israel Land Authority requirements), many agricultural estate market transactions are for the sale and/or acquisition of all the rights attributed to the estate.
As a rule, these are tax-intensive transactions where the tax rate is entirely dependent on the circumstances of the specific land transaction case.
Transactions for the sale / purchase of all estate property rights.
As a rule, these are tax-intensive transactions, where the tax rate depends on the circumstances of the specific case.
Taxes from Property Appreciation
The Betterment Tax is a direct tax that is paid in respect of the increase in a property’s value, from the date of its present acquisition until the date of sale.
This is usually the dominant tax component for all taxes imposed on the seller.
As agricultural estates are a mixed assets, which include a residential unit piece, which exists together with a business component (this is the agricultural piece), the distinction between these pieces and properly allocating proceeds from sales and inheritances are extremely important:
As a result, the legislature announced an exemption allocation for betterment taxes, in relation to capital gains coming from the sale of residential dwellings, in the Real Estate Appraisers’ Bureau journal edition for March 2016. NOTE: This applies only to the residential dwelling portions of agricultural estates. Exemptions can be found in sections 49(b)2, 49(b)5, and Preferred tax calculations in 48a (b2).
If a property contains more rights than those for residential dwellings – all agricultural estates fall into this category – it’s necessary to separate the residential dwelling rights (which will benefit from this exemption or a special tax calculation for eligible residential dwellings) from the additional building rights and/or any other rights that will not benefit from the exemption and therefore must be taxed differently.
The legislature determined in Section 49G of Real Estate Tax Law, that exemptions would only be granted for part of the proceeds from an exchange in respect to the residential dwellings. The exception is therefore only granted for the residential dwelling portion of an agricultural estate. Additionally, this section stipulates limited ceiling for exemptions on this part of the additional rights sold, if the value of the sold apartment is lower than the fixed ceiling. (As of 2015, the ceiling was set at NIS 2,064,600.) (This hereinafter will be referred to as a “Split Speculation“)
The following is a number of judgments, and amongst them are:
- Civil Appeal (CA) 02/6486 Rachel Lahav v. the Civil Administration Director
- CA 87/651 the Land Betterment Tax Director v. Roshgold
- CA 977/733 Erlich v. the Land Betterment Tax Director
- CA 92/2191 Nessel v. the Land Betterment Tax Director
In summary, in order to prevent claims by taxpayers sold residential dwelling, while in the process additional rights are also sold, it was determined that in appropriate cases, there should be a physical split of the land rights and proceeds should be attributed to two separate properties: The ruling created the following policy – for the first property, it should be awarded residential dwelling rights; for the second, it should be awarded the remaining applicable rights (which is not the rights of a residential dwelling). (This is hereinafter referred to as a “Physical Split“).
Therefore, for agricultural estate sales, a number of physical splits are required. The split technique was validated by the Supreme Court’s ruling (see CA 98/5434, Land Betterment Tax Director v. Lelazari).
In the case of a farm sale, it is necessary to distinguish between proceeds paid for the dwelling and/or residential buildings, and the proceeds attributed to building rights and any remaining rights pertaining to the agricultural sector.
Following Amendment 78 to the Real Estate Taxation Law (hereafter referred to as “the Law”), the exemption limit for residential dwellings was limited to NIS 5.4 million (as of 2015, this was adjusted to NIS 49,000,000). At the time of sale, any amount attributed to the residential apartment value will be calculated as a tax beneficiary according to section 48a (b2), where the seller meets all other exemption conditions. When there are a number of residential apartments in the property, two tax calculations may also be applied. It should be noted that this benefit applies until the end of 2017, in accordance with the terms and provisions of Amendment 76 to the Law.
With respect to the betterment levy, agreement fees, and all other expenses, we will only note here that these are expenses that may be permitted, minus the betterment amount relative to the component that owes the betterment fees.
Purchase tax
The Purchase Tax is an indirect, “turnover tax”. Section 9 of the Law calls for a purchase tax, which does not apply to the exemption clauses set forth in Chapters Five and Six of the Law. Therefore, there is no similar mechanism of “Split Speculation” (verdict 106929-05-12 in Lask, et al., v. Netanya’s Land Betterment Tax) regarding the purchase tax. Despite the absence of a mechanism requiring speculation compensation, it is customary to create physical divisions in respect to the purchase tax.
For Purchase Tax purposes, it is customary to divide the Agricultural Estate’s bundle of rights into four parts:
- The residential dwellings and/or the existing residential buildings on the estate.
- The remaining residential plot that allows for establishing non-agricultural business activity (e.g., hotel, factory, store, etc.).
- The estate’s agricultural land.
- The seller and Moshav Association’s rights.
A different tax applies for each component:
The beneficiary tax for a single unit is calculated according to the number of units owned by the buyer. A buyer, where the unit is his only holding, is entitled to a staggered tax bracket. Whereas, a buyer who owns a number of units is subjected to elevated tax brackets.
The tax rate for land not defined as agricultural land and also not defined as residential land (including land for hotels, industry, commercial use, etc.) is 6%.
With regard to the agricultural part of the estate: the buyer is entitled to request a Beneficiary Tax calculation, in accordance with regulation 16 of the Purchase Tax Regulations … and to calculate a beneficiary tax of 5.0% up to a ceiling of NIS 347,755 – as of 2015, any amount beyond the ceiling will be taxed at 6%.
In respect to seller rights within the Moshav Association, as long as it is found that this is indeed an economic value right, no purchase tax will be imposed whatsoever.
The Value Added Tax Law
The Value Added Tax Law requires VAT (a Value Added Tax, currently set at 17%) be included in the sale of an “asset” by a seller. An “asset” is broadly defined and includes real estate land. In a judgment given in District Court 93/1499 Dror Marley v. the VAT Management, the question of VAT liability in agricultural land sales was discussed. The court determined that in the same case where entitlement rights are a land right, this also constitutes an “asset” for the purposes of the VAT Law.
The court ruled that the price paid for an agricultural estate – which includes both a farm and a residential dwelling – is a total price that includes the three components:a residential dwelling and building rights that are not liable for VAT, and agricultural land that is considered to be an “asset” whose sale is subject to VAT.
It was also determined that if the seller was required to collect VAT, and agricultural revenues were income for which VAT was reported, VAT would be paid on the sale of the agricultural area from which the business owner derived income.
It should be noted, that if the agricultural area sold was not used in business activity, it can be argued that this transaction is not subject to VAT.
As far as business activities are concerned, in many cases, sellers seek to offset VAT paid to the Israel Lands Authority. VAT authorities often claim that input will only be returned according to the parts attributed to the agricultural component of the sale.
Land Inheritance
It is not possible to split investee rights, as this is usually an agreement according to which the property holder owns the property by virtue of an “optional” agreement that renews every three years. Therefore, it is also not possible to jointly hold an inheritance together with others (with the exception of spouses).
It should be noted that in the event of a death, correct as of today, this does not create a tax event. The heirs are therefore not liable for tax, in accordance with section 4 of the Law, which states that the heirs are not recognized under the tax liability.
When an estate holder dies and leaves no will and/or the holder’s will determines a number of heirs, it is not possible to register the estate in the name of all the heirs, due to the Israel Lands Authority’s decision.
Notwithstanding the aforementioned situations, if one of the heirs (hereafter known as the “inheriting child”) proves to the Israel Lands Authority that he has the ability to continue cultivating forested land, it is possible to register the property in the inheriting child’s name.
As in many cases, in the event of death where several heirs are named, all named heirs agree that the inheritance will be registered in the name of one of the named heirs, and this heir will compensate the other heirs. In the event that the compensation derives from the estate’s money and meets the conditions of section 5(c)(4), settling the estate is not considered to be a sale. If, however, the property is for the most part an economically significant asset, and it is necessary for compensation to not be included in estate assets, a transaction is created that is liable for both Betterment and Purchase Taxes.
Following Amendment 82 to the Law, the Linear Beneficiary Calculation is extended in a manner that also applies for transaction between relatives, in which section 5(c)(4) also applies, as stated above, and if the estate includes a residential dwelling.
The property has at least one residential dwelling and tax liability can therefore be significantly reduced through proper use of section 48a(b2) of the Law, for all cases mentioned above.
