What expenses can I deduct from Israeli capital gains tax when selling property?

Israeli capital gains tax on real estate, the betterment levy (mas shevach), is levied on your profit rather than the headline sale price, so the deductions you can prove directly shrink the bill. Section 39 of the Real Estate Taxation Law 1963 allows you to subtract the original purchase price, the purchase tax (mas rechisha) you paid on acquisition, lawyer and broker fees on both the buying and selling ends, and the cost of improvements that added lasting value such as a renovation or an added room. Routine maintenance and your own time do not count. For a non-resident seller, the practical battle is documentary: the Tax Authority will not accept a deduction you cannot back with an invoice and proof of payment.

---

Detailed Explanation

The starting point is that mas shevach taxes the appreciation, defined as the sale consideration minus the acquisition value and minus the expenses the law permits. Section 39 of the Real Estate Taxation Law 1963 sets out the deductible categories. The largest is the original purchase price, indexed for inflation. On top of that you may deduct the purchase tax you paid when you bought, the legal fees and brokerage commission on both the acquisition and the sale, fees paid to an appraiser or surveyor, and interest on a mortgage taken to buy or improve the property, subject to conditions.

Improvement costs are where sellers leave money on the table. Expenditure that improves the property and is reflected in its value at sale, a structural renovation, a new kitchen, an extension, can be deducted, but ordinary upkeep cannot. Repainting before a sale or fixing a leak is maintenance, not improvement. The distinction is decided on the facts, and the Israel Tax Authority (Rashut HaMisim) expects contractor invoices, building permits where relevant, and bank evidence that you actually paid. A renovation paid in cash with no paperwork is, for tax purposes, a renovation that never happened.

Two further rules hit non-residents harder than locals. First, the principal-residence exemption that shelters many Israeli sellers is generally not available to someone whose only home is abroad, so the gain is usually fully taxable, which we cover in our guide to the capital gains tax exemption on selling an Israeli apartment. Second, for property bought before 1 January 2014, the linear apportionment rules split the gain into pre- and post-2014 periods taxed at different effective rates, so the date you acquired matters as much as the costs you deduct. A non-resident also faces withholding at source on the sale, recovered or reduced through a withholding certificate.

In Practice: Under Section 39 of the Real Estate Taxation Law 1963, deductible costs include purchase tax, legal and brokerage fees, and documented improvements. A mas shevach self-assessment must be filed with the Israel Tax Authority within 30 days of signing the sale contract, and the standard rate on the real (post-2014) gain for an individual is 25%. On a NIS 3,000,000 sale with a NIS 1,800,000 indexed purchase cost and NIS 150,000 in proven renovations and fees, the taxable gain falls by that NIS 150,000, cutting the tax by about NIS 37,500.

Key Considerations

• The tax is on the gain, so every proven cost reduces it directly.
• Purchase price, purchase tax, legal and agent fees, and value-adding improvements are deductible.
• Routine maintenance and undocumented cash work are not deductible.
• Pre-2014 acquisitions are split under linear apportionment, changing the effective rate.
• Non-residents rarely qualify for the principal-residence exemption and face withholding at source.

When to Consult a Lawyer

This question typically requires professional legal advice when:

• You made significant renovations and need to prove they qualify as improvements, not maintenance.
• The property was acquired before 2014 and linear apportionment applies to the gain.
• You face withholding at source and want a reduced-withholding certificate before completion.

A qualified Israeli real estate tax lawyer should review your cost documentation before the 30-day filing deadline, because deductions claimed without proof are routinely struck out.

---

Speak With an Israeli Attorney

We prepare mas shevach self-assessments for non-resident sellers, assemble and defend the deduction file, and apply for reduced-withholding certificates so proceeds are not over-withheld at completion.

Contact us for a confidential initial consultation.