The controversial new tax break for young couples in Israel will shortly be signed into law by the Knesset. Known as the 0% VAT benefit, it exempts the purchasers of newly built properties from paying 18% VAT on their new home if they are aged 35 or over and married with children. If they have performed their national service they can buy a property worth up to 1.6 million NIS and if they have not, the exemption only covers properties up to 1 million NIS.
The purpose of the tax benefit is clearly political rather than economic. It was first mooted as part of a political package designed to ‘spread the burden’ in Israeli society and reward those who have served in the army or national service. Although it was said that it would make it easier for young couples to buy their first property, it is already clear that it will help very few people and have no impact on the inflated Israeli real estate market.
Israeli property prices are continuing to rise, with more demand than supply. Attempts to increase the supply of land for building, and to encourage construction of more affordable apartments in the areas where young couples want to live because of employment opportunities, have clearly failed. A family with children would not find a new property in the center of Israel for 1.6 million NIS to purchase with their 0% sales tax benefit. They would probably not find a second-hand property at that price either.
The tax benefit may be part of a wider political campaign to encourage families to move to Israel’s peripheral areas, but even here prices are rising steadily, and anecdotal evidence suggests that building companies are setting the prices of their new homes just above the 1.6 million NIS threshold. After all, this tax break is of no benefit to them – they have paid VAT on the construction materials and will lose out if their purchasers are exempt from the sales tax.
As a property investment adviser, I can tell you that this highly publicized tax break will not slow the rise in Israeli property prices. The main factors driving prices are strong natural growth and increasing Aliyah. I believe that there are 16 million Jewish people in the world who may consider buying real estate in Israel, in addition to Israel’s growing population of 7 million people, and there is simply not enough housing in this small country. Instead of the 0% sticking plaster, we need real incentives for developers to build more homes at affordable prices.
Until then, your properties in Israel will continue to appreciate, and young families will continue to rent them!
Shaun Isaacson is a qualified lawyer and realtor and CEO of Creative Estates Israel, which provides investment and property management services for property owners in Israel.