Tips for buying and selling real estate in Israel.
Contributed by Adv. Lisa Segelov and Adv. Jay Hait
The purchasing and the selling of real estate in Israel is fraught with legal difficulties owing to the particularly complex range of different land rights existing under Israeli law, real estate taxation and other technical pitfalls. Therefore, the services of an experienced lawyer specializing in real estate law is essential.
The Process of Buying and Selling Real Estate
In Israel, the usual process of the buying and selling of real estate is as follows:
Step 1: The parties negotiate to finalize all terms of the sale agreement including consideration, terms of payment, date of possession and the fittings and furniture included in the transaction (if any).
Step 2: Simultaneously with step 1 above, the checking of the land rights in and to the property and its registration, zoning, and the checking of the actual physical state of the property.
Step 3: The sale agreement is signed by the parties. Upon the signing of the agreement, part of the consideration is paid to the seller and then a cautionary note is registered in the Land Registration Office in favor of the purchaser to show that the purchaser now has an interest in the property. Within 40 days from the signing of the sale agreement, both parties are required to file the appropriate taxation documentation with the Land Tax Authorities.
Step 4: A mortgage may be obtained by the purchaser, if required.
Step 5: When the final payment is made to the seller, the purchaser is then able to take possession of the property. In most instances, part of the consideration will be held in trust by the seller’s lawyer pending receipt of all of the necessary documents required to register the purchaser’s rights with the relevant authorities, namely the Land Registration Office, or the Israel Lands Administration, or any other relevant body such as a settlement company.
Step 6: Actual registration takes place after all of the required documentation from the tax authorities, city council and other relevant authorities has been issued.
Types of land rights in Israel
Israeli law recognizes various land rights including freehold land, long term leases with the Israel Lands Authority, Short Term Renewable Leases with the Israel Land Authority and rights with a Settlement Company (in Hebrew known as a “Hevra Meshakunit”). The nature of these land rights determines the legal safeguards needed when selling or purchasing real estate in Israel.
Zoning and building rights
Often purchasers and sellers of real estate discover only after signing the sale contract that the real estate being the subject of the sale does NOT meet the requirements of the zoning/building requirements (in most cases as a result of additions that have been constructed without licenses such as adding a room, closing a balcony, building a basement, construction of a loft and so on).
In some instances, complications arise where the intended use of the land by the purchaser does not match the zoning regulations, for example, the use of part of a house or garage for commercial purposes or an office, the use of farm land for commercial purposes, use of commercial property for residential purposes, and so on.
It is therefore imperative that diligent and thorough checks take place with the appropriate zoning authorities before the purchase/sale with the guidance of a competent lawyer in order to determine that all is in order and to avoid paying substantial levies/taxes and possible contractual damages to your seller/purchaser.
Letter of Agreement ( known in Hebrew as “Zichron Devrim“)
Sometimes, a seller or purchaser under pressure from real estate agents or simply as the result of a desire to confirm that “the deal is done”, sign a Letter of Agreement (in Hebrew known as “Zichron Devrim”). A Letter of Agreement details a number of provisions and conditions that have been agreed between the parties relating to the proposed real estate transaction.
It is important to stress that a Letter of Agreement is a legally binding contract even though it may be only a few lines if it includes the following:
- the names of the parties;
- the consideration to be paid;
- the details of the property;
- the date of payment of the consideration; and
- the date of transfer of possession.
Since this document is a legal and binding agreement, either party can sue for the enforcement of the agreement. In addition, it is encumbering upon each party to file tax documentation within 40 days of the signing of this document.
Cohen Segelov & Co. Advocates and Notaries strongly advise our clients not to sign a Letter of Agreement as such a document more often than not lacks many accompanying details that still need to be agreed by the parties. Secondly, such documents are often signed without receiving essential professional advice relating to the nature of the land rights, zoning rights and so on and before thorough checks have taken place.
Israeli banks are conservative when providing loans for the purchase of real estate.
It should be noted that:
- the leverage rate is usually lower than what is supplied by overseas banks;
- the bank will require, in addition to the property to be mortgaged, additional security for the return of the loan, that is, the borrower must be in good financial standing and have an income. Usually the bank will only lend an amount where the monthly repayment is no more than 1/3 of a family’s net income.
Mortgage repayments vary from bank to bank and are highly competitive. Therefore, it is advisable to shop around before taking a mortgage. Recently, insurance companies in Israel began offering competitive mortgages. Cohen Segelov & Co. Advocates and Notaries can assist you in this matter.
The process of obtaining a mortgage is lengthy and involves substantial documentation. When a purchaser wishes to obtain a mortgage in order to finance his/her purchase, the seller is obligated to sign on certain documentation due to the fact that at the time of the receipt of the loan the seller is almost always still the registered owner of the property. Therefore, it is important for the seller to ensure that the above documentation will not prejudice his/her rights in the event that the contract is cancelled by either of the parties or the purchaser is unable to make meet his/her mortgage payments before the registration process is completed. A competent attorney can negotiate with the mortgage bank on his/her client’s behalf on some of the terms stated in the documentation to ensure that the seller is not prejudiced by registering a mortgage on behalf of the purchaser’s bank before the purchaser receives possession and ownership of the real estate.
Signing of documents by parties not present in Israel
If either the seller or the purchaser is not physically present in Israel, the sale or purchase transaction can still take place by the overseas party signing the following required documentation at the Israeli consulate or before a notary whose signature is then authenticated by means of an Apostille seal in accordance with the Hague Convention. Depending on which country the overseas party resides in, the Apostille seal can be obtained from the Authentication Department of the Department of Foreign Affairs or from the local courts. Cohen Segelov & Co. Advocates and Notaries can advise you in regard to these matters.
It should be noted that the following documentation needs to be signed personally, and can’t be signed using a Power of Attorney:
- an initial General Power of Attorney to sell/purchase the property before the sale agreement is signed;
- an Irrevocable Power of Attorney to sell/purchase the property after the contract is signed in favor of the purchaser;
- Land Appreciation Tax Exemption Form by the seller if an exemption is being requested; and
- Various mortgage documents (depending on the mortgage bank).
In addition to the above, certified copies of the sellers/purchasers passport or identity book must be provided.
Real estate taxation
This is an extremely complex issue which can’t be comprehensively covered in this article and requires individual counsel according to the specific transaction. Generally land appreciation tax is levied on the seller according to the number of years that the property was owned by the seller at the rate of the real appreciation of the real estate less the costs involved in the purchasing and the selling of the real estate (such as legal fees, purchase tax, capitalization fees, real estate agent’s fees, land valuer’s fees, betterment tax and so on). There is an exemption on one’s residential dwelling provided that the person doesn’t own any other property up to an amount equal to 4,445,000 NIS. There is no exemption for a foreign resident except if he/she doesn’t own any other residential property elsewhere in the world. Inherited property doesn’t affect this exemption except in limited circumstances.
Acquisition tax is payable on the purchase of property in Israel. Rates vary depending on the type of property owners.
Property Value (NIS)
As of January 16,2020 until January 15,2021
Israeli resident single home owner
0 to 1,744,505
1,744,505 to 2,069,205
2,069,205 to 5,338,290
5,338,290 to 17,794,305
Israeli citizen, multiple home owner, foreign resident owner
0 to 5,340,425
Non-Israeli making aliyah
0 to 1,838,615
Betterment tax is levied and paid to the local authorities in regard to the increase in the value of real estate that has occurred as a result of a change in zoning rights whether by a change of zoning itself (temporarily or permanently for example, from agricultural to residential) or by increasing the amount of meterage that can be built, for example, building an additional floor or a basement.
Capitalization (known in Hebrew as “Dmei Hivun”)
93% of the land in Israel is held by long term leaseholders who lease the land from the Israel Land Administration. Instead of paying a yearly rental, the Israel Land Authority capitalizes the payment for the full rental period (in Hebrew this payment is known as “dmei hivun”). The Israel Land Administration is in the process of capitalizing all residential properties that it rents as well as some of the individual farm holdings.
The capitalization payment is levied at percentage of the value of the land excluding the value of the buildings erected on the land and ranges from 5- 15% of the value of the land depending on the zoning rights of the land. In some cases, the capitalization amount levied can be appealed. Cohen Segelov & Co. Advocates is a well-known specialist firm in this area of law.
Please don’t hesitate to contact us for further information.
Hait & Co Law Offices
Cohen Segelov & Co. Advocates and Notaries
Telephone: 972 3 613 4244
Fax: 972 3 6134245
This article contains general information about legal matters. The information is not advice, and should not be treated as such. You must not rely on the information contained in this article as an alternative to legal advice from us. If you have any specific questions about any legal matter you should consult us directly. You should never delay seeking legal advice, disregard legal advice, or commence or discontinue any legal action because of information contained therein.