Law tackling gray economy by limiting cash deals lurches real estate market

Law tackling gray economy by limiting cash deals lurches real estate market

Finance Ministry’s chief economist finds a rise in deals as buyers rushed to complete purchases before new regulation to curb tax evasion came into force on January 1

A couple looks at real estate ads in the coastal city of Netanya, July 29, 2015. (AP Photo/Sebastian Scheiner)
A couple looks at real estate ads in the coastal city of Netanya, July 29, 2015. (AP Photo/Sebastian Scheiner)

Moves to reduce Israel’s shadow economy and curb tax evasion appear to have already impacted residential real estate transactions, with a leap in apartment deals recorded during December, followed by a drop in January, the month when a new law limiting the use of cash came into force.

In January, around 9,200 apartments changed hands – 8,000 of them on the open market and 1,200 subsidized by the government.

Those 8,000 free-market transactions were the lowest number recorded for the first month of the year since 2012.

In December, by contrast, a total of 11,000 transactions took place (including an unspecified number of subsidized units) in a jump that prompted predictions of a rising housing market.

According to a report by the chief economist released Tuesday, however, that blip now appears to have had more to do with closing deals before January 1, after which it became illegal to buy a home with cash.

Apartments under construction in the Israeli city of Ashkelon. (Photo by Lior Mizrahi/Flash90)

In January, real estate investors (as opposed to home buyers) bought 1,100 apartments, down 27 percent from such transactions in December and in January of last year.

Foreigners accounted for 7% of those investors, buying just 75 apartments in the first month of this year, half of them in Jerusalem.

The law to reduce the use of cash in the market was passed by the Knesset in March, after two years of debate.

It limits cash transactions between private individuals to NIS 50,000 ($13,800) and business deals in cash to just NIS 11,000 (just over $3,000). Where one of the business partners is a tourist, up to NIS 55,000 ($15,200) is allowed to change hands.

The legislation also obliges property buyers to declare where the financing has come from.

According to the Justice Ministry’s Prohibition of Money Laundering and Terrorism Financing Authority, the new rules are aimed at reducing the shadow economy and helping to slash serious crime, tax evasion, money laundering and terror financing.

Construction of a new apartment and office building near Hillel Street in Jerusalem’s city center, December 18, 2018. (Hadas Parush/Flash90)

A March 2018 OECD economic survey of Israel estimated the share of the country’s shadow economy to be “about twice as large as in the United States, the United Kingdom or Canada.”

A 2010 World Bank study put that economy between 1999 and 2006 at an average of 22% of GDP.

The law authorizes the finance minister to tighten the cash limits even further from 2020, subject to the agreement of the justice minister, the Bank of Israel’s governor and the Knesset’s law committee.

It does not, however, affect new immigrants or returning Israelis for their first ten years in the country.

That is thanks to Amendment 168 to the Tax Ordinance passed in 2008, which not only exempts those two categories of people from paying taxes on income earned abroad for ten years – it also lets them off reporting on that income.

Former Israel Tax Authority director general Moshe Asher said last year that because of Amendment 168, Israel has become one of the world’s “most generous tax havens.”

Moshe Asher, Israel Tax Authority chief (Courtesy)

For him, it represents a secrecy measure that prevents Israel from upholding its international commitments to share tax information with other countries.

But his attempts to have the reporting exemption canceled were repeatedly thwarted by members of Israel’s governing coalition.

Sofer Landver (Yisrael Beytenu), a former immigrant and absorption minister, has argued that the amendment has attracted many new immigrants to Israel and that countries such as the UK and Italy have similar laws.

On a positive note, the latest figures from the Finance Ministry show that young couples bought 4,900 units (including the 1,200 subsidized by the government) in January.

This represented an 8% rise, compared with January 2017.

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