The taxation of inherited real estate involves a complex set of laws and regulations governing assets that pass from generation to generation. While many countries levy an inheritance tax as a central part of their tax policy, the situation in Israel is different. Israel imposes no direct inheritance tax, but many heirs encounter capital gains tax when they sell an inherited property.
In fact, the capital gains tax is calculated from the historical value of the property at the time the deceased acquired it, which adds a layer of complexity to the system. The absence of an inheritance tax periodically fuels debate about possible reforms that would promote economic balance among the population and bring Israel in line with international norms. The taxation of inherited real estate raises real dilemmas, both for property owners and for their heirs, who need to understand what it means for them in practice.
Taxation of Inherited Real Estate – General Background
The rules on inherited real estate define how rights in property pass from one generation to the next without the state levying a direct tax on the inheritance itself. There are, however, other tax liabilities that can reduce the net value of the estate, such as capital gains tax and betterment charges when the property is sold.
While receiving an inheritance is not itself taxed, any later transaction, such as selling the property, may create a tax liability. The Real Estate Taxation (Appreciation) Law, for example, provides that an heir who sells a property may owe appreciation (capital gains) tax. The law distinguishes between different situations and includes possible exemptions, but without advance planning heirs can find themselves facing unexpected tax bills.
Legal Framework
The Inheritance Law of 1965
The Inheritance Law sets out the main rules for transferring assets after death. It distinguishes between inheritance under a will and inheritance by law, where there is no will. Within this framework, the law defines who is entitled to inherit, how the estate may be administered, and how rights are divided among the heirs.
For the taxation of inherited real estate, it matters whether the inheritance passed under a will or by law, since this affects the tax procedures and the exemptions that may apply. In some cases, for example, a direct transfer between close family members can avoid certain taxes.
The Income Tax Ordinance and the Real Estate Appreciation Tax Law
The Income Tax Ordinance deals with many types of income, including income from the sale of inherited assets. Under Section 88 of the Ordinance, when an asset is inherited the heir steps into the shoes of the deceased for tax purposes, meaning the deceased’s original purchase price serves as the basis for calculating capital gains tax on a future sale.
The Real Estate Appreciation Tax Law provides that when an heir sells a property, the tax is calculated on the difference between the sale price and the original value of the property as purchased by the deceased. If the property has appreciated over the years, the heirs may face a significant tax bill.
Types of Tax on Inherited Real Estate
Capital Gains Tax
Capital gains tax applies to any real estate sale, including inherited property. In many cases the liability arises because the property has risen in value over the years and its current worth is far above the original purchase price. The tax is usually 25% of the real gain, though exemptions or reliefs apply in certain cases.
Estate Tax Considerations
Although there is no formal estate tax, tax considerations still arise when assets pass by inheritance. In an inheritance involving multiple assets, for example, a poorly planned division among the heirs can create greater exposure to capital gains tax down the road. Early estate planning can reduce the tax burden and smooth the transfer of assets to the heirs.
Exemptions and Reliefs
General Exemptions
The law grants a tax exemption for inherited assets worth up to 1.64 million NIS. In addition, transfers between spouses during their lifetime are not treated as a taxable transaction.
Foreign Residents
Non-residents who inherit property may face different tax liabilities. Unlike Israeli citizens, for example, they are not eligible for certain exemptions available on the sale of a property.
The Valuation Process
Valuing the inherited assets is a critical step in the taxation process. The tax liability is determined by the estimated value of the property on the day of the deceased’s death. Disputes among heirs over the property’s value sometimes make an appeal to the tax authorities necessary.
The future of inheritance tax in Israel
The taxation of inherited real estate may yet see reforms that introduce a formal inheritance tax. Discussions are under way, but no official decision has been made. In the meantime, capital gains tax and real estate appreciation tax remain significant factors in inheriting estates and inherited assets.
Realizing an inheritance demands careful management, particularly around contractual arrangements with
financial institutions and the regulatory requirements. That includes understanding how the various tax laws affect
the transfer of the property, assessing deductible expenses, and knowing the dispute resolution procedures in inheritance matters. It is therefore wise for
individuals to consult legal experts in Israeli inheritance law who can guide them
through these processes effectively.
If you are dealing with questions of inherited real estate taxation and need professional guidance, I am here to help. I am Adv. Avital Horef, a lawyer practicing inheritance law and property taxation, and I will help you understand your rights, use the exemptions available to you, and avoid unnecessary tax payments. Contact me today for tailored legal advice that will give you peace of mind and effective solutions.
