Section 85: The "Second Chance" for Tax Assessment Correction

Disclaimer: This article is for informational purposes only and does not constitute legal or tax advice. It is highly recommended to consult with a specialized real estate tax attorney or a certified appraiser before executing any transaction.

Section 85 of the Real Estate Taxation Law serves as a "safety valve," allowing taxpayers to reopen and correct a closed tax assessment within four years from the date the self-assessment was approved or the assessment was determined by the Tax Authority, as applicable. The correction must be based on one of the statutory grounds set out in the Law.

While attorneys manage the procedural filing, the Certified Real Estate Appraiser is the critical figure who provides the economic evidence to justify a tax reduction.

Note: The ability to amend an assessment is not automatic and is subject to the discretion of the tax authority and statutory limitations.

1. Comparison: Purchase Tax vs. Appreciation Tax (Mas Shevach)

Feature	Purchase Tax (Mas Rechisha)	Appreciation Tax (Mas Shevach)
Focus	Reducing the acquisition value or changing classification.	Reducing the taxable profit (25% rate).*
Timeline	4 years from approval of the self-assessment or determination of an assessment by the Tax Authority, as applicable.	4 years from approval of the self-assessment or determination of an assessment by the Tax Authority, as applicable.
The "Melchior" Rule	Highly relevant for construction delays.	Less common, usually fixed at sale.
Appraiser's Role	Providing retrospective market-value evidence, documenting the property's condition at the transaction date, and assessing valuation issues relevant to the disputed assessment.	roviding retrospective valuation of improvements, historical property values, or the allocation between a residential dwelling and additional building rights, where relevant to the tax issue.

*where supported by the facts and applicable law, the calculation of the taxable gain, including the acquisition value, allowable expenses, applicable exemptions, or other valuation matters relevant to the assessment.

2. Grounds for Reopening an Assessment (Section 85)

Under Section 85, an assessment can be amended if:

1. Newly discovered facts: Facts have come to light that, alone or together with the material available to the Tax Authority Director when the assessment was made, could create a tax liability or change the amount of tax.

2. An incorrect declaration by the seller: The seller submitted an incorrect declaration that affected the amount of tax or prevented tax from being paid.

3. An error in the assessment: An error was discovered in the assessment itself.

3. The Appraiser’s Role in Section 85 Corrections

A. In Purchase Tax (Mas Rechisha)

• Challenging Market Value: Where the Tax Authority's valuation differs from the value supported by the transaction and market evidence, a real estate appraiser may prepare a retrospective valuation as of the transaction date. The report may examine structural defects, the property's physical condition, location, noise exposure, planning restrictions, and comparable transactions. These factors may support a different valuation, but the contract price is not automatically conclusive for tax purposes.

• Separating the Value of a Dwelling from Additional Building Rights: Where a transaction involves a house and land with additional or unused building rights, a retrospective appraisal may help assess the market value attributable to the existing dwelling and the additional rights, where this distinction is relevant under the applicable tax rules. The allocation must be supported by the property's planning status, physical characteristics, and market evidence. The tax treatment depends on the applicable law and cannot be determined by the valuation allocation alone.

• Property Classification and Physical Condition: Where the tax treatment depends on whether the property qualified as a residential dwelling or was an unfinished structure or land at the transaction date, a retrospective appraisal can document its physical condition and state of completion on that date. The appraisal provides evidence of the property's condition; the legal classification must be determined under the applicable tax provisions.

B. In Appreciation Tax (Mas Shevach)

• Retrospective Valuation of Improvements: Where renovation or improvement expenses are relevant to the calculation of Appreciation Tax but the original documentation is incomplete, a real estate appraiser may estimate the nature, extent, and historical value or cost of the work based on the available evidence. This may include photographs, permits, plans, contractor records, and the property's historical condition. An appraisal can support the valuation evidence, but it does not by itself establish that an expense is deductible under the applicable tax rules.

• Allocation under Section 49Z: Where the consideration for a qualifying residential dwelling is affected by additional building rights, Section 49Z provides a specific framework for calculating the tax treatment of the consideration attributable to the dwelling and the additional rights. A retrospective appraisal may help establish the relevant values and support the allocation, based on the property's characteristics, planning status, and market evidence. The resulting exemption or tax liability depends on the statutory conditions and calculation rules; neither component should be described as automatically exempt or fully taxable in every case.

• Historical Property Valuation: For property acquired many years ago, including property received by inheritance, a retrospective appraisal may help establish a historical market value at a legally relevant date where that value is relevant to the tax calculation. The appropriate valuation date and the role of that value depend on the property's acquisition history and the applicable tax provisions. The appraisal may support the calculation but does not independently determine the taxable gain or eliminate tax on inflationary gains.

4. The Four-Year Deadline: The Melchior Case and Extensions under Section 107

Section 85 generally allows a real estate tax assessment to be amended within four years from the applicable statutory starting date. The deadline and the legal basis for the requested amendment must be examined in light of the specific circumstances.

The Melchior case concerned purchase-tax treatment in the context of a new apartment whose delivery was delayed, affecting the timing of the sale of another apartment. It should not be presented as establishing a general rule that the four-year period under Section 85 always begins only when the taxpayer becomes entitled to a refund or sells the previous apartment.

A separate Supreme Court decision, Mittel Avivi Reich, Civil Appeal 9817/17, addressed the Director's authority to extend the Section 85 period under Section 107. The possibility of an extension is legally distinct from the calculation of the original four-year period and depends on the applicable law and the circumstances of the case.

Practical implication: Where the four-year period has expired, the taxpayer should not assume that a construction delay or a later entitlement to a tax benefit automatically makes the request timely. The applicable starting date and the possibility of seeking an extension should be assessed before filing.

5. Strategic Warning: Assess the Potential Consequences Before Filing

A request to amend a tax assessment should be evaluated before it is submitted. The requested amendment may be rejected, accepted only in part, or produce a different tax result than the taxpayer expected. The Tax Authority may scrutinize the evidence and issues relevant to the requested amendment, so the taxpayer should not assume that the proposed correction will necessarily reduce the tax liability.

For example, a request to recognize additional renovation expenses should be supported by evidence concerning the nature, amount, timing, and legal relevance of those expenses. Before filing, the taxpayer and their advisers should assess the strength of the evidence, the statutory basis for the request, any deadline issues, and the potential tax consequences.

The Risk: When you file a request under Section 85 (e.g., to add 200,000 ILS in renovation expenses), the Tax Authority gains the right to re-examine the entire file. They may accept your renovation costs but simultaneously decide that your original sale price was undervalued, ultimately resulting in a higher tax bill than before.

Bottom Line:

Section 85 can provide a route to correcting a real estate tax assessment, but the outcome depends on the statutory grounds, the available evidence, and the applicable deadline. A preliminary review by a real estate appraiser and a tax lawyer can help determine whether there is a sound valuation or factual basis for the request, what additional documentation may be needed, and whether the potential benefit justifies the cost and uncertainty of proceeding.

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