Capital Gains Tax Exemption on the Sale of an Inherited Apartment
The Real Estate Taxation Law provides that inheritance is not a transaction; this means that inheritance (whether by intestate succession or by will) offers a rare opportunity for legitimate tax planning that allows transactions exempt from capital gains tax (betterment tax). The transfer from the deceased to the heir is not a transaction and is therefore exempt from capital gains tax and purchase tax. So if you inherited an apartment or part of an apartment and you, alone or together with other heirs, wish to sell it, there are several conditions under which you will be exempt from capital gains tax on the sale of the inherited apartment. These are the conditions for a capital gains tax exemption on the sale of an inherited apartment (even if you already owned another apartment before receiving the inherited one):
The first and most important rule is that the heir steps into the shoes of the deceased
1. It is a residential apartment that meets the conditions of the law, meaning the apartment is used for residence or is by its nature intended for residence, and has all the functional facilities an apartment requires (kitchen, shower and toilet).
2. The heir is the deceased's spouse, a descendant, or a descendant's spouse - only if this family relationship exists between the deceased and the heir will the heir be entitled to the capital gains tax exemption. If you inherited an apartment from a brother or sister and wish to sell it, you will not be entitled to the exemption.
3. Before their death, the deceased owned only one residential apartment - if the deceased owned more than one apartment (even if part of an apartment), you will not be entitled to the capital gains tax exemption. For example, if the deceased owned one apartment and half of another, you will not be entitled to the exemption on the sale of the inherited apartment. If the deceased owned an apartment and a plot of land, you will be entitled to the exemption on the sale of the inherited apartment, since at the time of death the deceased owned only one residential apartment (land is not considered an apartment).
4. Had the deceased been alive and sold the apartment, the deceased would have been entitled to the capital gains tax exemption - the idea is that the heir steps into the shoes of the deceased, so if the deceased would not have been entitled to the exemption, neither will the heir. For example, if the deceased had not owned the apartment for 18 months and the heirs sold it before 18 months had passed, you will not be entitled to the exemption on the sale. In such a case, the heirs should keep the apartment until 18 months have passed (the ownership periods of the deceased and the heirs are counted together).
5. The sale price does not exceed NIS 4,603,000 - if you meet all the conditions above but the price received for the inherited apartment exceeds this amount (the amount is updated annually; the figure above is correct for 2022), you will be entitled to an exemption up to that amount and the balance will be subject to capital gains tax. This condition is not specific to the sale of an inherited apartment; it applies to any sale of a residential apartment.
6. The price is not affected by additional building rights - if you meet all the conditions above but the price received for the inherited apartment is affected by additional unused building rights, you will be entitled to a capital gains tax exemption on the value of the apartment, and the additional building rights will be subject to capital gains tax. This condition is not specific to the sale of an inherited apartment; it applies to any sale of a residential apartment. Sometimes some of the heirs wish to buy out the shares of the others. In such a case, it is possible to achieve optimal tax results and often even a full tax exemption. For this, you are welcome to contact our office for advice.