Contrary to popular belief, the purpose of signing a prenuptial agreement is not just to dictate the division of property in the event of divorce. Signing a prenuptial agreement can also provide significant tax advantages to a couple during their lives together. What’s more, the signing date of the prenuptial agreement is significant for tax purposes: the sooner, the better!
The Presumption of the Family Unit
The Israeli Real Estate Taxation Law includes the presumption of the family unit, impacting both capital gains tax and purchase tax. Under this presumption, the Israel Tax Authority treats all family members as a single seller or purchaser. Exceptions are made for a spouse living separately, married children under 18, and orphaned children. This approach aims to treat family members as one unit for tax purposes and to prevent improper tax planning.
However, the implications of this presumption can be absurd. Suppose a young couple marries, and the woman owns a residential apartment purchased by her parents before her marriage. This apartment, registered solely under her name, is now deemed jointly owned by her and her husband for tax purposes due to the presumption of the family unit. Thus, when the couple buys a joint apartment, the Israel Tax Authority (ITA) will tax both the wife and husband at the tax brackets for purchasing an additional apartment. These are considerably higher than for a first apartment. This is despite the fact the husband never purchased a residential apartment before, and his wife owned her apartment before they even met.
Prenuptial Agreement and Separation of Property
The key to solving this problem is signing a prenuptial agreement, and, in some cases, even a nuptial agreement. Such types of agreement stipulate that, under certain conditions, the ITA may accept the claim the presumption of the family unit was controverted, and deem the couple’s assets as separated. Using the above example: the couple signs a prenuptial agreement in which the separation of property clause states that the husband has no rights in the wife’s apartment, and she is the sole spouse who may benefit from its profits. If the couple maintains a separation of property, when buying a new joint apartment, the husband can benefit from the lower tax brackets for his share.
Recent Israeli Supreme Court rulings mandate meeting two cumulative conditions to controvert the presumption of the family unit. One is the existence of a prenuptial agreement. The second is the actual separation of property. These rules are subject to interpretation and the lower courts’ diverse rulings indicate that there are circumstances in which it is difficult to predict the ITA’s position.
Nevertheless, the couple may need to answer certain questions to determine the likelihood of controverting the presumption.
Did the couple sign a prenuptial agreement approved by a competent court and, if so, when?
If the answer is no, then the ITA’s position is that the presumption is incontrovertible and the assets cannot be separated. However, it’s important to note that, in specific circumstances, there are grounds for claiming that the presumption is controvertible even without a prenuptial agreement. Yet, this necessitates thorough legal clarification.
Is the couple actually maintaining a separation of property?
To ascertain this, the couple must answer several additional questions. These questions pertain to a residential apartment solely owned and registered under the name of one spouse.
- Was the apartment purchased before or after the couple’s marriage?
- Did the spouse who is not the registered owner (the other spouse) participate in financing the purchase? Does that spouse pay mortgage payments or serve as a guarantor for the mortgage?
- Does the couple reside in the apartment or is it letting it?
- If the couple rents out the apartment, does it deposit rent payments into its joint bank account, or into a separate bank account of the spouse in whose name the apartment is registered?
- Did the couple ever massively renovate the apartment? If so, did the other spouse participate in financing the renovation?
Answering these questions can clarify the couple’s ability to challenge the family unit presumption and gain significant tax benefits.
[View source.]
