Your Taxes: Tax penalty for couples, married or not

If you buy or sell a home in Israel, your tax will be higher if you are married or living together as a common-law couple, than if you are single, according to the real estate tax law. That is unless you have a prenup or postnup and meet certain other conditions, according to Supreme Court case law. 

Wealth agreements

The Wealth Relationship Between Couples Law, 1973 lays down the rules for pre-nups and post-nups, utilizing the term “wealth agreement.” The law allows the courts to confirm wealth agreements written by couples. If there is no agreement, this law deems the couple’s resources (other than pre-marital assets and pension) to be equalized at 50:50. The Israeli Tax Authority has been known to invoke this rule if it suits them. But the law lays down other detailed rules, including one that states: A marriage shall not impact the property of the couple, nor grant one spouse rights to the assets of the other, nor impose responsibility for debts of the one spouse on the other (Section 4). Lawyers should be consulted on all such legal matters.

Tax penalty for couples

The Real Estate Taxation Law (RETL) deems couples, whether married or living together, and their children to be a single taxpayer (RETL Sections 9C1C(4)(C)) and 49(b)). There are tax breaks for couples that own only one home in Israel. But tax problems abound if one spouse (or partner) happens to own another home, such as from an earlier relationship.

Tax on buying

If a resident Israeli couple buys a home in Israel, they may have to pay 8%-10% purchase tax on the entire price if they or their spouse already own an Israeli home – rather than 0% on the first NIS 1,919,155 (figures for 2023).

Tax on selling

If a couple sells an Israeli home worth under NIS 4,846,000, they may have to pay up to 28% land appreciation tax (capital gains tax) if one of the spouses owns another home.

Supreme Court vs chauvinism

The Supreme Court has reviewed the tax penalty for couples several times and ruled on two cases heard together (Real Estate Tax Director v. Blank and v. Rosenboim, Civil Appeals 4298/18, 1886/19, 20.4.21).

The Supreme Court called on the Knesset to amend the tax penalty for couples, but in the meantime voted (2-1) to ignore ownership of a second home owned by only one of the partners in cases where couples have a written wealth agreement specifying separate ownership of that home. This followed earlier contradictory cases.

Judge Neal Hendel even quoted a song by Crosby Stills & Nash; “They are one person, they are two alone, they are three together, they are for each other.” 

After quoting William Blackstone from 1765: “The husband and wife are one, and that one is the husband… the very being or legal existence of the woman is suspended during the marriage” (Commentaries on the Law of England, 442), Judge Ofer Grosskopf critically remarked that the “marriage penalty” approach was no longer in existence, worldwide, except in Israeli real estate taxation.

Main facts of the cases

Two cases were heard together. 

In one case about purchase tax, a couple purchased a home jointly. However, one spouse owned another property before they married and retained sole ownership of it under a prenup wealth agreement. The court granted purchase-tax relief to the wife because she did not own any other home and the wealth agreement was upheld, having been signed in good faith.

In the other case, related to land appreciation tax (capital gains tax), an unmarried couple moved in together in 2003 but did not sign a wealth agreement until 2011. The man had bought the home he currently owned, but did not live in, before the couple got together. The woman retained sole ownership over the home where the couple lived (which she had first occupied in 2001, with a previous husband) and that she had bought with money from her family in 2006. No tax planning here, the Court ruled, even though the man lived on her property and contributed financially to its renovation. The Court upheld the wealth agreement – since he only owned one home, there was no extra tax for him when they sold their joint home.

To sum up

Check out whether a wealth agreement might beat the tax penalty for living together. As always, consult experienced professional advisors in each country at an early stage in specific cases.

The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd. He can be contacted at leon@hcat.com