Your Taxes: Israeli property flip ends with a costly VAT lesson

An Israeli District Court ruled that a taxpayer who recovered VAT on a residential property purchase cannot later reverse that recovery to avoid VAT on the sale. The case involved an American LLC that bought a Tel Aviv building in 2008, recovered input VAT, rented it out for eight years, then sold it in 2016 for NIS 33.34 million. The court held that full VAT applied to the sale, rejecting the taxpayer's attempt to change its mind.

An Israeli District Court ruling serves as a costly warning for property investors: recovering VAT on a purchase can trigger a much larger VAT bill on a later sale if plans change. The case involved Twenty Four Seven International Holdings LLC, an American company that bought a Tel Aviv building in 2008 for NIS 3.7 million plus VAT. The VAT office allowed the company to recover the input VAT because it intended to flip the property quickly. Instead, the company rented out the apartments and shops for eight years before selling in 2016 for NIS 33.34 million. When the sale approached, the company tried to refund the VAT it had recovered on the purchase, arguing it should never have been allowed to recover it in the first place. The court rejected this, ruling that since the input VAT was recovered, full VAT applied to the sale price. The ruling underscores the importance of understanding long-term VAT implications when investing in Israeli real estate, particularly the consequences of changing from a flip strategy to a hold-and-rent strategy.