How US Siblings Granted a Tax-Free Option on Their Israeli Plot

Result: A Section 49I option granted and exercised with no tax on the grant, and the modelled NIS 1.6M betterment charge falling only when the NIS 8.4M consideration arrived · Timeline: 11 months from first draft to exercise · Challenge: Developer's draft breached three Section 49I conditions · Authority: Director of Real Estate Taxation, Israel Tax Authority · Financial Impact: About NIS 480,000 of duplicated purchase tax avoided

Background

Three siblings, living in New Jersey, Massachusetts and California, own a 1.4 dunam plot on the eastern edge of Ramat HaSharon. Their father bought it in 1998, died in Herzliya in 2016, and the plot was registered into their three names at the Land Registry in 2019 after the succession order came through. None of them has lived in Israel. The eldest had visited the plot once, in 2004.

In early 2025 a Petah Tikva developer approached them. He was assembling their plot with two neighbouring parcels and wanted eighteen to twenty-four months to get a plan through the local planning committee before committing to buy. What he proposed was an option rather than a sale, and he sent a draft with a covering note describing it as the standard Israeli structure that carries no tax until exercise. That description is accurate only if the document satisfies Section 49I of the Real Estate Taxation (Appreciation and Purchase) Law 5723-1963. His did not.

The Challenge

Section 49I creates what Israeli practitioners call a unique option, an optzia yichudit, and an option that meets every one of its conditions is not treated as a sale of a right in land at all. The conditions are cumulative and there is no partial credit. The option must be in writing. It must be transferable and exercisable on the terms set out in the agreement. The grantor's undertaking to sell must be irrevocable for the option period. The holder must not be given a right of possession in the land. The exercise period must not exceed 24 months from the day of grant. The consideration for the option itself must not exceed 5% of the value of the right in the land or of the exercise price, whichever is higher. And notice of the grant must reach the Director of Real Estate Taxation within 30 days.

The developer's draft failed three of them. The exercise period was 36 months with a further 12 month extension at the holder's election. It gave the developer a right to enter, fence and hold the plot for soil and contamination testing, which reads as possession. And the premium offered was NIS 520,000 against a plot the parties were treating as worth NIS 8,000,000, which is 6.5%. The draft said nothing about the 30 day notice, and nothing in it obliged the developer to file anything.

Miss one condition and the grant is a disposal of a right in land in its own right. That is the arithmetic that made this urgent. The siblings' acquisition cost is not what the plot was worth when their father died. Where the deceased died after 1 April 1981, the date estate duty was abolished in Israel, Section 26(a)(2) of the same Law fixes the acquisition value as the value that would have been determined had the deceased sold it, so the siblings carry their father's 1998 purchase price and his 1998 acquisition date. Against a plot now worth NIS 8,000,000 that produces a large gain. We modelled the betterment tax after indexation and allowable expenses at roughly NIS 1,600,000. Signing the developer's draft would have crystallised that liability in June 2025, with NIS 400,000 to NIS 520,000 of premium in hand against it and no certainty that the sale would ever happen.

In Practice: Section 49I of the Real Estate Taxation (Appreciation and Purchase) Law 5723-1963 requires the option to be in writing, irrevocable on the grantor's side, transferable, without any right of possession, limited to 24 months, with consideration no greater than 5% of the value of the right or of the exercise price, whichever is higher, and notified to the Director of Real Estate Taxation within 30 days of grant. On a plot valued at NIS 8,000,000 that fixes the premium ceiling at NIS 400,000. Where all limbs hold, the grant and any later assignment carry neither betterment tax nor purchase tax, and both taxes arrive together only on exercise.

What We Did

We started with the register rather than the contract. A nesach tabu extract confirmed the 2019 registration was clean, that the three shares were equal and that no caution or charge sat against the plot. An unregistered inheritance is the single most common reason an option deal collapses at signature, because every co-owner has to grant on identical terms and an estate that has not been brought onto the register cannot do that. This file had been closed properly six years earlier, which saved four to six months.

Then we rebuilt the option around the statute. The term came down to a hard 24 months with no extension mechanism of any kind, and we removed the renewal clause rather than capping it, because a right to extend that is never exercised is still a right to extend. The possession clause went. In its place the siblings undertook to procure access for the developer's surveyor and soil engineer on seven days' written notice, at reasonable hours, with the siblings' Israeli representative entitled to attend. The developer got everything he actually needed for the testing and none of the control that would have taken the arrangement outside Section 49I.

The premium was the delicate negotiation. The 5% ceiling is measured against the Director's view of the value of the right, not against the number the parties write into their agreement, so a premium that looks compliant on the contract can breach the ceiling once an assessment issues. We commissioned a valuation from an Israeli land assessor before signature, who put the plot at NIS 8,300,000. That gave a ceiling of NIS 415,000, and we settled the premium at NIS 400,000, deliberately below the line rather than against it. The developer preferred the reduction to the risk, because a failed option would have handed him a purchase tax bill on the grant as well.

The powers of attorney were begun before the commercial terms were agreed, which is the part clients abroad consistently leave too late. Three siblings in three states meant three separate notarised instruments and three separate apostilles, issued by the New Jersey Division of Revenue and Enterprise Services, the Massachusetts Secretary of the Commonwealth and the California Secretary of State. The three offices took between five and nineteen business days. Had we waited for the contract to be settled, the 30 day notice period would have been running while the paperwork crossed the Atlantic.

The option was granted on 4 June 2025. Notice of the grant reached the Director of Real Estate Taxation on 13 June, on day nine, with the valuation, the executed option and the three powers of attorney attached.

In Practice: Because the deceased died after 1 April 1981, Section 26(a)(2) of the Real Estate Taxation (Appreciation and Purchase) Law 5723-1963 carries the deceased's own acquisition date and value onto the heirs, so a 1998 purchase price sets the base against a 2026 sale price. On exercise, purchase tax on land runs at a flat 6% and is charged on the full consideration including the option premium, which on NIS 8,400,000 is NIS 504,000, payable to the Israel Tax Authority within 60 days of the exercise date. The betterment declaration is due within 30 days of the sale agreement.

The Outcome

The developer secured his planning position faster than expected and exercised on 12 May 2026, in month eleven of the twenty-four. The exercise price was NIS 8,000,000 as fixed in the option, and the NIS 400,000 premium already paid counted into the consideration, so the transaction was reported at NIS 8,400,000. Purchase tax of NIS 504,000 fell on the developer. The siblings' betterment liability, modelled at roughly NIS 1,600,000, was assessed and paid out of the completion funds rather than out of their own pockets.

Nothing was payable in June 2025 when the option was granted, which was the entire point. Had the draft been signed as sent, the grant would have been a taxable sale on that date, the siblings would have had to fund a seven figure betterment charge eleven months before the price arrived, and purchase tax of about NIS 480,000 would have been payable on the grant and again on the exercise. A developer asked to pay purchase tax twice does not absorb it. He prices it back into the deal, and the siblings would have carried it in the exercise price.

There was also a downside case that never happened but was priced throughout. If the planning committee had refused and the developer had walked, the siblings would have kept NIS 400,000 for eleven months of market exposure, with no tax event, no assessment and the plot still registered in their names. That is a real number to weigh, and on an NIS 8,000,000 asset it is a modest one. It is the reason we advised them not to grant a second option to the same developer had the first lapsed, since two consecutive options over the same land invite the Director to look at the arrangement as a whole.

Key Takeaways

What this case illustrates for non-residents in similar situations:

1. A developer's option draft is written for the developer. The 24 month ceiling, the possession clause and the 5% premium are the three limbs that fail most often, and the tax consequence of failure falls on the grantor who signed it, not on the party who drafted it.
2. Measure the premium against a valuation, not against the contract price. The 5% ceiling runs off the Director's assessment of the value of the right, so a premium set at exactly 5% of an agreed figure can breach it retrospectively. Commission the valuation before signature and sit under the line.
3. Start the powers of attorney before the commercial terms are settled. Apostilles from three different US states took five to nineteen business days here, and the 30 day notice to the Director runs from the day of grant, not from completion.
4. Check that the inheritance is actually registered. Co-owners must grant on identical terms, and an estate still sitting outside the Land Registry has to be cleared first, which routinely adds four to six months to a deal the developer expects to sign this quarter.
5. Know your acquisition base before you negotiate. Under Section 26(a)(2) heirs inherit the deceased's cost and date, so a plot bought in 1998 carries a 1998 base into a 2026 sale, and the deferred charge is far larger than owners who think of the death as a fresh start expect. Our guide on options to buy Israeli land for non-resident owners sets out the full structure.

---

Facing a Similar Situation?

If an Israeli developer has offered you an option over land you own from abroad, the document you have been sent will decide whether the grant is a tax free event or a taxable sale, and the difference is usually seven figures. We test the draft against every limb of Section 49I, commission the valuation the 5% ceiling is measured against, and file the notice to the Director inside the 30 day window under a power of attorney while you stay where you are. Our answer on how a developer's option on Israeli land is taxed covers the conditions in full.

Contact us for a confidential consultation about your Israeli legal matter.