Depreciation of the apartment

It is recommended to deduct the amount of depreciation from the purchase value that the seller is entitled to on the apartment sold under the Income Tax Ordinance.

The issue of depreciation is a broad and important issue but deviates from the issue that we are dealing with in this chapter, so I will address this only in a few sentences.
A residential apartment consists of ‘land’ and an apartment is built on it. The Income Tax Ordinance recognizes an apartment as wear and tear asset while the land stands forever.

Therefore, the rule of thumb in the professional provisions of the income tax is to recognize the ownership of the land in a new apartment in an urban area as if it were one-third of the total value of the residential apartment. In rural areas, the wear is higher and the landless expensive, so the land will be recognized as a quarter of the cost of the residential apartment. This value increases with the aging of the building.

Of the value determined for the residential apartment, there is, as stated, wear and tear or depreciation according to the regulations, so that the depreciation of stone buildings is 1.5% to 2% per year. For dilapidated buildings depreciation up to 6.5% per year.

The whole matter of depreciation is not relevant in cases where the seller lived in the old apartment that was not rented at all, in which case the seller is not entitled to recognize the depreciation for income tax purposes.

A particularly problematic issue concerns cases where the apartment was rented with full exemption from income tax under section 122 of the Income Tax Ordinance, where the tax authorities still insist on deducting an exemption embodying the balance of expenses, although the matter of depreciation under the full exemption route is irrelevant.

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Apartments in Israel
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Rise in the price index of input in residential construction from the year 1956 to 2021
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