Capital Gains Tax Guide on Inheritance or Gift of an Apartment

What is Capital Gains Tax on Inheritance or Gift of an Apartment?

Capital gains tax is a tax levied on the profit generated by the increase in the property's value from the time of its original purchase until the date of inheritance or receipt of the gift. When you inherit an apartment or receive an apartment as a gift, Israeli law imposes a tax obligation on you that can be substantial, even if there is no direct financial transaction involved.

Unlike a regular real estate sale transaction, where the seller pays the capital gains tax, in inheritance and gifts — the matter is more complex. The heir or gift recipient may face an obligation to pay capital gains tax on the difference between the property's value at the time of original acquisition and its value at the time of transfer to them. This is why it is crucial to understand the rules, calculations, and ways to plan properly from a legal perspective.

Mandelboim, Gor, Witzman-Gor & Co. provides in-depth legal advice on this subject, drawing on more than 18 years of experience in real estate and property law. We help inheritance recipients and gift recipients understand their obligations and plan the correct steps forward.

Who Pays Capital Gains Tax on Inheritance and Gifts?

In inheritance, the heir(s) are those who may face capital gains tax obligations. However, the law grants significant exemptions and exceptions that are important to understand.

• In inheritance of an apartment for personal use: Generally, if the property was the deceased's primary residence, there are significant exemptions or reductions in capital gains tax. This depends on the heir's family relationship to the deceased and the circumstances of the inheritance.
• In inheritance of an investment apartment: Capital gains tax can be higher, since the property is not a primary residence.
• Upon receipt of a gift: The gift recipient may be liable for capital gains tax, even if they are a close family member. The law on this matter is stricter than in the case of inheritance.
• Mixed transactions: In certain cases, such as joint purchase of an apartment during the property owner's lifetime, with part of it transferred by inheritance, there can be a combination of calculations.

It is important to note that capital gains tax is not imposed automatically. A declaration must be filed with the Tax Authority, and in some cases, exemption requests or legal arguments must be submitted. This is why experienced legal advice is often necessary.

How is Capital Gains Tax on Inheritance and Gifts Calculated?

Calculation of capital gains tax is based on two key values: the property's value at the time of original purchase (when the previous owner acquired the property) and the property's value at the time of transfer (inheritance or gift).

Basic formula:

• Capital Gains Tax = (Current value of property — Value at acquisition) × Tax rate (usually between 25%-30%, depending on the applicable tax rate in the relevant period)

However, the actual calculation is far more complex, as the acquisition value must be updated to reflect investments made in the property (improvements, major repairs, etc.), and price indices and tax periods must be taken into account.

Factors affecting the calculation:

• Updates for investments: If the property owner invested in substantial improvements, the base value may increase, thereby reducing capital gains tax.
• Date of original purchase: Properties purchased in the distant past may have low base values, which increases capital gains tax.
• Price index: The Central Bureau of Statistics publishes a price index that updates the acquisition value based on inflation.
• Exemptions and exceptions: There are cases where capital gains tax is reduced or eliminated entirely (for example, inheritance of an apartment for personal use by a heir who is a spouse or child of the deceased).

Due to the complexity of these calculations, it is very important to use the services of an experienced law firm to ensure that the calculation is done correctly and that you do not pay more than necessary.

Exemptions and Exceptions in Capital Gains Tax on Inheritance and Gifts

Israeli law provides several exemptions and exceptions from capital gains tax in the context of inheritance and gifts. Understanding these exemptions can save you significant money.

Exemption on Inheritance of an Apartment for Personal Use

If the property was an apartment that was used by the property owner (the deceased) for personal use as a primary residence, a substantial exemption exists. The exemption depends on the heir's family relationship:

• Spouse: Generally receives full or near-full exemption from capital gains tax.
• Children: May be entitled to partial or full exemption, depending on circumstances and age.
• Parents: Generally not entitled to substantial exemption, but may be entitled to certain reliefs.
• Other Family Members: May be entitled to certain reliefs, but generally not full exemption.

Gift of Real Estate

Upon receiving a gift of an apartment, the gift recipient may be liable for capital gains tax. However, there are cases where a partial exemption exists, particularly if the gift is given within a close family and by a donor who has a natural interest in supporting others.

Properties Purchased During Certain Periods

Properties purchased before certain dates may be entitled to special treatment or capital gains tax reductions, depending on changes in the law over the years.

It is important to note that these exemptions are not automatic. A formal request must be filed and properly substantiated. This is why it is advisable to consult with an experienced law firm to ensure you receive all the exemptions you are entitled to.

Comparison: Capital Gains Tax on Inheritance vs. Gift vs. Purchase

It is important to understand the differences between these three scenarios, as each has different tax implications:

As can be seen, inheritance generally provides significant tax advantages compared to a gift or purchase, especially when dealing with a residential apartment for personal use. This is why proper legal planning can save you substantial amounts.

Deadlines and Filing Obligations

One of the most critical issues regarding capital gains tax on inheritance and gifts is the deadline for filing a tax return. Missing the deadline can result in significant financial penalties and interest charges.

Filing deadline for inheritance

Generally, you must file a tax return within one year from the opening of the estate journal in the court. However, in certain cases, this deadline may be longer or shorter, depending on the specific circumstances of the inheritance.

Filing deadline for receiving a gift

Upon receiving a gift, you must generally file a return within one year from receipt of the gift. It is important to note that if the gift was given orally without an official document, the deadline may be different.

Penalties for non-filing or late filing

If you fail to file a return on time, you may face significant financial penalties, interest on the unpaid amount, and even legal proceedings. Additionally, interest begins to accrue from the original deadline, and even if you file a late return, you will still owe this interest.

Mandelboim, Gor, Witzman-Gor and Co. assists in planning deadlines and ensuring that returns are filed on time, in order to avoid such penalties.

Tips for Proper Legal Planning and Minimizing Tax Liability

There are several ways you can plan an inheritance or gift in a legally proper manner to reduce your tax liability:

1. Check Your Exemption Eligibility

Carefully examine whether you are entitled to a significant exemption. If you are a close family member of the deceased and the apartment was their primary residence, you may be entitled to a substantial or even complete exemption. This examination is not always conducted, and as a result, many pay more than necessary.

2. Update the Base Value of the Property

If the property owner invested in significant improvements (such as major renovations, expansion, system upgrades), ensure that these investments are documented. Such improvements can increase the property's base value, which reduces capital gains tax.

3. Timing of Tax Declaration Filing

In some cases, the timing of filing a capital gains tax declaration can be strategic. For example, in an inheritance, if there are multiple heirs, there may be tax advantages to filing separate or joint declarations, depending on the circumstances.

4. Consider Alternative Legal Structures

In some cases, there may be alternative legal structures (such as agreements between heirs or conditional transactions) that can reduce tax liability. However, these must be carefully examined with an experienced law firm.

5. Maintain Complete Documentation

Complete documentation of all investments, improvements, and expenses related to the property is essential. Without documentation, it is difficult to prove to the tax authorities that these investments were actually made.

6. Consult with a Law Firm in a Timely Manner

Every moment counts. Early legal consultation can save you time, money, and considerable worry down the road.