TAMA 38 and Pinui-Binui Tax for Non-Resident Owners

A developer's glossy letter reaches an owner in Melbourne, or Toronto, or Golders Green: your building in Tel Aviv has been earmarked for demolition and reconstruction, and you are invited to sign. For a landlord who has quietly collected rent from an old two-bedroom flat for twenty years, the letter reads as either a windfall or a threat, and often as both at once. Will they hand over an asset and be taxed on a gain they never cashed? Can the project happen without them? What does a bigger, newer apartment do to a tax bill they never see coming?

These are the questions non-resident owners bring me once Israel's urban renewal machine reaches their building. The two programmes driving it are pinui binui (פינוי בינוי), the evacuate-and-rebuild model where whole blocks come down and taller ones go up, and TAMA 38, the national plan under which older buildings are reinforced against earthquakes and expanded in exchange for extra building rights. Both carry substantial tax exemptions written into Israeli law. Both also carry traps that fall hardest on an owner who is not in the country to watch the project unfold.

The reassuring headline is that the main tax reliefs are not reserved for residents. The complications, when they come, are usually about the cap on those reliefs, about purchase tax on the new unit, and about the practicalities of signing a decade-long deal from the other side of the world.

Two Programmes, One Set of Exemptions

Urban renewal in Israel runs on two tracks, and it helps to keep them apart.

Pinui-binui is the demolition model. A developer assembles the consent of the owners in a complex, the building or cluster is knocked down, and a larger project rises in its place. Each participating owner typically receives a new, larger apartment in the finished building, plus rent and bank guarantees during construction. The complex has to be formally designated, and that designation is what unlocks the tax benefits.

TAMA 38 is the reinforcement model. Rather than demolish, the developer strengthens an existing building against earthquakes and, in return for the works, receives rights to add floors or apartments to sell. Owners commonly gain an extra room, a mamad (protected room), a lift, and a renovated building, with the developer funding it all from the new rights.

Both tracks are overseen at national level by the Government Authority for Urban Renewal (HaRashut HaMemshaltit LeHitchadshut Ironit), established under the Urban Renewal Authority Law 2016, and on the ground by the local planning and building committee that declares and permits the project. For a foreign owner, the label on the letter matters, because the exemption you rely on depends on which track you are on.

The Land Appreciation Tax Exemption

Here is the fear most non-resident owners arrive with: if I give up my old apartment, will Israel tax me on decades of paper gain? For a qualifying urban renewal exchange, the answer is generally no, and that is the single most valuable feature of these deals.

Ordinarily, selling an Israeli apartment triggers mas shevach (מס שבח), land appreciation tax, charged at 25% on an individual's real, inflation-adjusted gain. Handing your flat to a pinui-binui developer looks like a sale, and legally it is one. But the Real Estate Taxation Law 1963 carves it out. Section 49KB (49כב) exempts the vacated owner from appreciation tax on the exchange of the old apartment for a new one in a declared pinui-binui complex, within statutory value limits. TAMA 38 has its own parallel relief in Section 49LB1 (49לב1), which exempts the sale of the building rights transferred to the developer.

The exemption is not unlimited, and the limit is where advice earns its keep. The pinui-binui relief covers a replacement apartment up to the higher of 150% of the old apartment's value or the old value plus an indexed monetary ceiling, whichever is greater. Value handed to you above that line, a much larger apartment, a second unit, or a cash payment, can fall outside the exemption and become taxable. The ceiling is indexed and revised, so the one figure you should never assume is that "it is all tax-free."

In Practice: Under Section 49KB of the Real Estate Taxation Law 1963, a non-resident owner who exchanges an old apartment for a new one in a declared pinui-binui complex is exempt from mas shevach on the swap up to the statutory value cap. On an apartment carrying an embedded real gain of NIS 1.5M, that exemption shelters roughly NIS 375,000 of appreciation tax that an ordinary sale would attract. The exchange still has to be reported to the Israel Tax Authority's real estate taxation office (misui mekarkein) within 30 days of signing the agreement, even though no tax is due, and the underlying project itself commonly runs 5 to 8 years from signing to keys.

Betterment Levy and Purchase Tax

Appreciation tax is only one of the property taxes in play. Two others matter to a foreign owner, and they behave differently.

The betterment levy, heitel hashbacha (היטל השבחה), is the municipal charge of 50% on the increase in a property's value caused by a planning decision. Urban renewal creates exactly the kind of value uplift that would normally trigger it, so the law grants relief: TAMA 38 works are exempt from the levy under the Third Schedule of the Planning and Building Law 1965, and pinui-binui benefits from reductions as well. Without these carve-outs the added building rights would generate levy bills that would sink the economics of the whole project. If you want the fuller picture of how this municipal levy differs from the national appreciation tax, our guide to the betterment levy versus appreciation tax untangles the two.

Purchase tax, mas rechisha, is the one that can surprise a non-resident on the way in rather than the way out. Amendment 96 to the Real Estate Taxation Law 1963 added Sections 49KZ1 (49כז1) and 49LO1 (49לו1), which treat the replacement apartment as a residential unit for purchase tax during the construction period, smoothing what would otherwise be an awkward gap while your old flat no longer exists and the new one is not yet built. On a genuine like-for-like swap, purchase tax is usually minimal. The exposure appears where the new unit is materially more valuable than the old, or where you already own other property, because a non-resident pays purchase tax at the higher bracket that applies to an additional apartment.

In Practice: TAMA 38 reinforcement works are exempt from the municipal betterment levy under the Third Schedule of the Planning and Building Law 1965, a relief administered by the local planning and building committee. Where a levy would otherwise apply, it runs at 50% of the value uplift, so an exemption on a NIS 400,000 uplift keeps roughly NIS 200,000 in the owner's pocket. But if a non-resident receives an upgraded apartment worth NIS 800,000 more than the exempt cap, purchase tax on that excess at the non-resident additional-apartment rate of 8% adds about NIS 64,000, payable to the Israel Tax Authority within 60 days of the transaction. The full purchase tax rules for foreign buyers are set out in our non-resident purchase tax guide.

The Non-Resident's Real Problem Is Presence

Notice that none of the exemptions above ask where the owner lives. That is the good news, and it is genuine: an owner in Sydney is entitled to the same Section 49KB relief as an owner in Ramat Gan. The disadvantages of being abroad are practical, not statutory, and they cluster around three things.

The first is signing and negotiating. Urban renewal agreements are long, developer-drafted, and heavily weighted toward the developer until an owners' lawyer pushes back. A non-resident cannot sit in the building meetings where terms are hammered out, cannot easily compare the offer with what neighbours are getting, and cannot pop into a notary's office to sign. All of this can be handled through an Israeli lawyer under a notarised and apostilled power of attorney, which is why arranging one early is the single most useful step a foreign owner can take. Our guide to the Israeli power of attorney for property matters covers how to execute one from abroad.

The second is time. These projects run for years, sometimes a decade, and the owner abroad has to stay reachable and engaged across the whole span, through the developer's financing, the permit stage, demolition, construction, and final registration of the new apartment in the Land Registry (Tabu).

The third is the home-country tax that Israeli advisers never mention. The Israeli exemption shelters you from Israeli appreciation tax, but your own country may still tax you, either on the exchange now or on the eventual sale of the new apartment later. An Australian, Canadian, or US owner has to weigh Israeli relief against home-country capital gains rules, and the two systems do not coordinate themselves.

Where Foreign Owners Get Caught Out

Common Mistake: Signing the developer's first draft, or refusing to engage at all, without Israeli advice. Sign too quickly and a non-resident can accept a replacement apartment whose value overshoots the Section 49KB cap, converting part of a tax-free exchange into a taxable one and importing a purchase tax bill on the excess. Refuse and go silent, and the remaining owners can invoke the Pinui-Binui (Compensation) Law 2006 to sue an unreasonable holdout for the losses the delay causes, with an overseas owner who ignored the correspondence squarely in the frame. Both mistakes come from the same root, treating a decade-long, tax-sensitive transaction as something that can be handled by post from abroad.

The pattern in almost every problem file is the absent owner who engaged too late. By the time a non-resident asks whether the deal is fair, the majority has often signed, the value split is fixed, and the room to negotiate guarantees or improve the tax outcome has narrowed. Owners who instruct an Israeli lawyer when the first developer letter arrives, rather than when the diggers are booked, keep both their negotiating position and their exemptions intact. For owners weighing whether to ride out the project or sell their rights to another investor instead, the mechanics of a remote disposal are covered in our guide to selling Israeli property from abroad.

Practical Checklist

• Identify which track you are on, pinui-binui or TAMA 38, because the exemption you rely on differs
• Confirm the complex has been formally declared, since the tax benefits flow from that designation
• Have an Israeli lawyer model the value cap under Section 49KB before you sign, so an upgraded unit does not create an unexpected taxable slice
• Check your purchase tax position on the new apartment, especially if you own other property and pay at non-resident rates
• Grant a notarised, apostilled power of attorney early so your lawyer can negotiate, sign, and file on your behalf
• File the required declaration with the Israel Tax Authority within 30 days of signing, even where no tax is due
• Take home-country tax advice in parallel, because the Israeli exemption does not bind your own tax authority
• Stay reachable for the full life of the project and do not let silence turn you into a holdout under the 2006 law

Speak With an Israeli Attorney

Urban renewal can turn a tired old flat into a modern apartment at a developer's expense, and for a non-resident owner the tax reliefs are real and generous, but they sit behind value caps, purchase tax rules, and a signing process that spans years and cannot be run by post. An Israeli property lawyer can read the developer's agreement, protect your position on value and guarantees, keep your Section 49 exemptions intact, and run the whole matter under power of attorney while you stay abroad.

Contact us for a confidential initial consultation.