How is Israeli capital gains tax calculated when I sell property I inherited?

An heir sells the inherited Tel Aviv apartment expecting the tax, if any, to be measured from its value when they inherited it. That is how many countries work, and it feels fair. Israel measures it differently, and the difference can be tens of thousands of shekels. The clock on the gain did not start when you inherited. It started when the person who left it to you first bought it.

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Detailed Explanation

Two separate events need to be kept apart. The first is the inheritance itself. Under the Real Estate Taxation Law 1963 (Hok Miysui Mekarkein), the transfer of property on death to the heirs is not treated as a "sale," so inheriting an Israeli apartment triggers no betterment tax and no purchase tax at that moment. Heirs sometimes stop there and assume the property is now "clean." It is not. The tax is deferred, not cancelled, and it lands when the heir sells.

The second event is that sale, and this is where Israel's rule surprises non-residents. Section 26 of the 1963 law provides that an heir acquires the property with the deceased's own acquisition cost and acquisition date. You step into the deceased's shoes. There is no step-up to the value at the date of death. So when you sell, the betterment tax (mas shevach) is calculated on the difference between your sale price and what the deceased originally paid, adjusted as the law allows, and the taxable holding period stretches back over the deceased's years of ownership as well as yours. On a property the family has held for decades, bought cheaply and now worth millions, that inherited-in gain can be substantial.

The holding period reaching back into the past also brings in the split-rate mechanism. For property acquired before 1 January 2014, the gain is apportioned linearly over time under Amendment 76, with the portion attributed to years before 2014 taxed at the older, sometimes higher, historic rates and the portion after 2014 at 25%. Because an inherited property often carries the deceased's pre-2014, or even much older, acquisition date, this linear apportionment frequently applies and needs careful calculation rather than a flat assumption of 25%.

There is an important relief that can eliminate the tax. Section 49B(5) of the 1963 law grants an exemption on the sale of an inherited residential apartment where three conditions are met: the seller is the deceased's spouse, child, or grandchild; the deceased left only one apartment; and the deceased, had they sold it themselves, would have been entitled to the exemption for a single dwelling. This "inherited home" exemption is one of the most valuable tools for foreign heirs, but it is conditional and easy to lose, for example if the deceased owned a second property. Whether you qualify, and how the linear apportionment runs if you do not, is exactly what to check before signing a sale contract. The wider sale process for foreign heirs, including the withholding certificate and Land Registry steps, is covered in our guide to selling inherited Israeli property as a non-resident.

In Practice: Under Section 26 of the Real Estate Taxation Law 1963 there is no step-up on inheritance, so the heir's gain is measured from the deceased's original cost and date, and the mas shevach declaration must be filed with the Israel Tax Authority (Rashut HaMisim) within 30 days of the sale. Where Section 49B(5) applies, a qualifying heir can sell the inherited home fully exempt; where it does not, the standard rate is 25% on the post-2014 portion under linear apportionment. A withholding certificate and clearance for the Land Registry (Tabu) transfer commonly takes 4 to 10 weeks.

Key Considerations

• Inheriting Israeli property is not itself taxed; the tax arises when the heir sells.
• Section 26 gives no step-up: the heir uses the deceased's original acquisition cost and date.
• The taxable gain and holding period reach back over the deceased's years of ownership.
• Pre-2014 acquisition dates trigger linear apportionment under Amendment 76, so the rate is not a flat 25%.
• Section 49B(5) can fully exempt a qualifying heir selling the deceased's single inherited home.

When to Consult a Lawyer

This question typically requires professional legal advice when:

• The property was bought long ago and the deceased's original cost and date must be reconstructed for the calculation.
• You may qualify for the Section 49B(5) inherited-home exemption and need to confirm the conditions before selling.
• The deceased owned more than one property, which affects both the exemption and the apportionment.

A qualified Israeli attorney should model the betterment tax and test the exemption before you commit to a sale, because the acquisition history, not the value at death, drives the bill.

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Speak With an Israeli Attorney

We calculate the betterment tax on inherited Israeli property, test eligibility for the Section 49B(5) exemption, handle the linear apportionment where it applies, and obtain the withholding certificate and Land Registry clearance so foreign heirs can sell without travelling.

Contact us for a confidential initial consultation.