Deducting Construction Expenses from Capital Gains Tax – Even in the Absence of Invoices

In January 2025, the Israel Tax Authority published a significant addition to an existing directive, easing the burden on sellers: even in the absence of formal invoices, sellers may still receive recognition for construction expenses to reduce their Capital Gains Tax (CGT) liability.

According to the amendment, where invoices are unavailable but the taxpayer can meet the burden of proof through related documentation — such as a work agreement, payment records, or any other document indicating the expense was indeed incurred for the construction of the sold apartment and the service provider is identifiable — the Tax Authority will act as follows:

• For construction performed before January 1, 2014 – the full reported expense may be deducted, as declared in the self-assessment.
• For construction performed after that date – the deduction will be allowed, but VAT and a 15% contractor’s profit margin will be deducted from the reported amount. If the reported construction costs deviate significantly and unjustifiably from the standard pricing index, the deductible amount will be based on that index.

In cases where the taxpayer does not meet the burden of proof, but a Tax Authority inspector visited the property, documented the construction, and estimated the year of execution, a different mechanism will apply:

• For construction prior to 2014 – the deduction will be based on standard industry estimates and pricing indexes according to the estimated year of construction, excluding VAT and contractor profit.
• For construction after 2014 – only two-thirds of the construction cost according to the index may be deducted, excluding VAT and contractor profit, and only if the seller provides an accountant’s certificate confirming that the expense has not been and will not be claimed under the Income Tax Ordinance or in the sale of another asset. Without this certificate or a justified reason for not providing it, the expense will not be recognized at all.

In exceptional cases, the Tax Authority inspector may require such an accountant’s certificate even for construction predating 2014. In the absence of such a certificate, only one-third of the expense will be recognized.

This directive could be a game-changer for thousands of home sellers who built their property years ago and no longer hold all the necessary documentation.

Authored by Adv. Sofi Sheinker, from our firm’s real estate department, Trust& Estates

Adv. Sheinker also provides legal services to our clients in Russian.