Tax on an Inherited Apartment in Israel
Receiving an apartment by inheritance is not a taxable event. The day the heir sells it is, and the tax that applies then is worked out from the deceased position rather than the heir. This guide explains what that means in practice, the special exemption for an inherited apartment, and what can go wrong when the estate is divided.
Inheritance is not a sale
Section 4 of the Real Estate Taxation Law provides that inheritance is not a sale for the purposes of the Law. The consequence is straightforward: an heir who receives an apartment from the estate pays no capital gains tax and no purchase tax on receiving it.
This confuses many people, because other countries have an estate tax. Israel has no inheritance tax, and receiving the asset does not by itself create a liability. There is, however, a duty to report and to register the rights in the heirs names, and those need completing.
Continuity of tax
That inheritance is not a sale does not mean the tax disappears. It is deferred to the point at which the heir sells, and is then computed on the continuity principle: the acquisition date and acquisition value are those of the deceased, not the heir and not the date of death.
Two practical consequences follow:
- The gain accrued across all the years the deceased owned the property is attributed to the heir. If the deceased bought decades ago at a low price, the taxable gain can be very large.
- If the deceased bought before 1 January 2014, beneficial linear apportionment may apply, under which the gain accrued up to that date is exempt. On older properties that changes the outcome materially.
Finding the deceased original purchase documents, including the purchase contract, receipts for renovations and proof of tax paid, is therefore not an archival exercise. It is what will determine the tax years from now.
Dividing the estate
Where there are several heirs and several assets, heirs commonly agree a division different from the shares in the inheritance order. One takes the apartment, another the money. The law allows that without treating it as a sale, but on two cumulative conditions:
- That this is the first division of the estate. Once the assets have been divided and registered under the inheritance order, any further transfer between the heirs is an ordinary taxable sale.
- That equalisation payments come only from the assets of the estate. If an heir tops up a sibling from his own pocket in order to take the apartment, that part is treated as an ordinary transaction and carries capital gains tax and purchase tax.
This is the most common failure. Heirs settle a fair division between themselves, one tops up another from a private account, and they discover afterwards that they created a taxable event. The agreement between heirs is built before the division, not after it.
The inherited apartment exemption
Alongside the ordinary sole residential apartment exemption, there is a special exemption for an apartment received by inheritance, under section 49B(5). Its distinguishing feature is that it does not depend on how many apartments the heir owns or on exemptions used in the past, because the test is applied to the deceased.
The three conditions:
- The seller is the spouse of the deceased, a descendant, or the spouse of a descendant.
- Immediately before death the deceased owned only one residential apartment.
- Had the deceased been alive and sold it, he would have been entitled to the exemption.
All three are cumulative. The deceased having held two apartments is enough to defeat this exemption, even where the heir owns no apartment at all.
The effect on sole apartment status
A separate question is how the inherited apartment affects your position in relation to another apartment you own. For the sole apartment exemption an additional apartment counts where the seller share in it exceeds one third, but for an apartment received by inheritance the threshold is higher and stands at one half.
An heir who received a relatively small share may therefore keep sole apartment status in relation to his own flat, while an heir who received a half or more may lose it. This affects purchase tax too if he buys another apartment, not only capital gains tax on a sale.
The order of steps
- Obtain an inheritance order or a probate order, which is the basis for everything else.
- Locate the deceased purchase documents: the purchase contract, tax confirmations, receipts for renovations and improvements.
- Check the state of the rights in the extract: whether the apartment is registered, whether there is a mortgage, whether there are notes.
- Build the division agreement between the heirs before the division, and make sure equalisation payments come from the estate.
- Check the exemptions: the inherited apartment exemption, the sole apartment exemption, and linear apportionment, and choose before selling.
- File with the tax authority on time, including where no liability arises.
Most of the damage in inheritance files comes not from the tax itself but from the wrong order: a division carried out before it was checked, or a sale made before the right exemption was chosen.
Every case is examined on its own facts. For a consultation with a lawyer from the real estate department call 02-5953322, send a WhatsApp message to 050-4411343 or leave your details in the form below, and we will get back to you as soon as possible.
What people ask most often
Is there an inheritance tax in Israel?
From what date is the gain computed when I sell?
We are three heirs and want an unequal division. Is that taxable?
What is the special exemption for an inherited apartment?
I received a share in an inherited apartment. Does that affect my sole apartment status?
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You have inherited an apartment
Selling an inherited apartment rests on sound tax planning among the heirs. We accompany the sale, draft the agreements between the heirs and represent you before the tax authorities. Tell us about the apartment and the heirs, and we will accompany you.