A developer wants an option on my Israeli land instead of buying it. How is that taxed?

Developers ask for options because an option costs a fraction of a purchase and buys time to assemble neighbouring plots or secure a permit. Israeli tax law encourages that, but only within a tightly drawn box. Section 49I of the Real Estate Taxation Law 5723-1963 creates what practitioners call a unique option, and an option that satisfies every one of its conditions is not treated as a sale of a right in land at all. Miss one condition and the grant itself becomes a taxable disposal.

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Detailed Answer

The conditions are cumulative. The option must be given in writing. It must be transferable and exercisable on the terms set out in the agreement. The seller's undertaking to sell must be irrevocable for the option period. The holder must not be given a right of possession in the land. The period during which the option may be exercised must not exceed 24 months from the day it was granted, and that ceiling is the one landowners most often try to negotiate around, usually by agreeing an extension that destroys the exemption. The consideration paid for the option itself must not exceed 5% of the value of the right in the land or of the exercise price fixed in the agreement, whichever is the higher. Notice of the grant must reach the Director of Real Estate Taxation within 30 days of the day the option was given. Where all of that holds, granting the option and later assigning it to another buyer carry neither betterment tax nor purchase tax, and the gain a dealer makes on assigning the option is treated as a capital gain under the Income Tax Ordinance rather than as betterment. Purchase tax and betterment tax arrive together on exercise, calculated on the full consideration including the option premium.

Distance changes the risk profile rather than the rules. An owner in Toronto or Melbourne who grants an option is committing the land for up to two years while remaining exposed to whatever happens in the Israeli market, and the option holder is not obliged to exercise. The 30 day notice is the deadline that catches people abroad, because it runs from signature, not from completion, and it depends on an Israeli lawyer holding a signed and apostilled power of attorney before the agreement is signed rather than after it. Two commercial points matter as much as the tax. The 5% ceiling means the premium you keep if the option lapses is genuinely small, so on an NIS 8,000,000 plot you are risking two years of market exposure for at most NIS 400,000. And because the option is transferable by design, the party who eventually exercises may not be the developer you dealt with. Where the developer instead offers to build on your land in exchange for part of the finished project, that is a different structure with different arithmetic, set out in our answer on combination transactions for a landowner living abroad.

In Practice: Section 49I of the Real Estate Taxation Law 5723-1963 requires the option to be in writing, irrevocable on the grantor's side, transferable, without possession, limited to 24 months, with consideration no greater than 5% of the value of the right or the exercise price, and notified to the Director of Real Estate Taxation within 30 days of grant. Grant and assignment then carry no betterment tax and no purchase tax. On a plot worth NIS 8,000,000 the premium ceiling is NIS 400,000, and on exercise purchase tax on land runs at a flat 6%, meaning NIS 480,000 payable within 60 days of the exercise date.

When to Consult a Lawyer

• The draft gives the developer a right to extend the option period, or to enter the land for surveys and soil testing. Either can push the arrangement outside Section 49I, and the tax consequence falls on you as the grantor, not on the developer who drafted it.
• The premium offered is close to the 5% line. Value is measured against the Director's assessment of the land, not the number in your agreement, and a premium that looks compliant on the contract can breach the ceiling once the assessment issues.
• The land is jointly owned with siblings or held through an estate that has not been fully registered. Every co-owner has to grant the option on the same terms, and an unregistered inheritance has to be cleared at the Land Registry first.

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Speak With an Israeli Attorney

We test the draft option against every limb of Section 49I, file the notice to the Director inside the 30 day window under a power of attorney, and model what you actually keep if the developer walks away.

Contact us for a confidential initial consultation.