Real Estate Transaction Between Family Members — What Are the Legal Risks?

Real Estate Transactions Between Relatives — Why Do They Require Legal Consultation?

A transaction involving the sale or purchase of real estate between family members — whether between parents and children, siblings, or other relatives — may sometimes appear to be a simple domestic matter. However, from a legal and tax perspective, such a transaction can pose significant risks that, if not handled properly, may lead to family disputes, unexpected tax liabilities, or even legal appeals years after the transaction is completed.

In a real estate transaction between relatives, the tax authorities (income tax, VAT) and registration authorities (land registry) view the transaction differently than a transaction between strangers. Capital gains tax laws, acquisition tax regulations, and laws regarding proof of the true price — all of these can impose unexpected financial obligations or even raise suspicions of money laundering or an artificial family arrangement.

At Mandelbaum, Gor, Witzman-Gor & Co., with over 18 years of experience in real estate and property law, we have guided dozens of clients through transactions between relatives. We understand the legal nuances, tax complexities, and procedural requirements necessary to protect your rights and avoid painful legal pitfalls. In this article, we will review the main risks, what you need to know, and how to conduct a transaction between relatives safely and legally.

The Main Legal Risks in Real Estate Transactions Between Relatives

When it comes to a transaction involving the sale or purchase of real estate between relatives, there are several legal risks of which you should be aware:

1. Capital Gains Tax in Transactions Between Relatives

One of the greatest risks in a real estate transaction between relatives is capital gains tax. Capital gains tax is a tax imposed on the profit generated from the sale of land or an apartment. Even if the transaction is between relatives, capital gains tax generally applies to the seller — regardless of the family relationship between the parties.

The Risk: If you do not plan properly, the seller may be required to pay a substantial capital gains tax that was not expected. In transactions between relatives, there is often a discount or a price lower than market value — and this is precisely what interests the authorities. The authorities may claim that the actual price is higher than that recorded in the contract, and accordingly, capital gains tax is calculated on the difference.

Example: If you sell an apartment to your son at half the market price, the authorities may determine that the "true" price is the market price and charge you capital gains tax on the full difference. This can result in a substantial debt, plus interest and penalties.

2. Acquisition Tax (Registration Fees) in Transactions Between Relatives

Acquisition tax, also called "registration fees," is a tax imposed on the purchaser upon acquisition of real estate. In transactions between relatives, there are reduced rates of acquisition tax, but they apply only under certain conditions that must be met precisely.

The Risk: If you do not meet the exact conditions for the discount, the purchaser may be liable for the full acquisition tax rate, which can be substantial. Furthermore, if the authorities suspect that the transaction is not genuine (for example, if it appears to be a family arrangement rather than an actual transaction), they may reject the discount and impose full tax.

3. Issues in Proving True Price

In transactions between relatives, the authorities immediately presume that the price recorded in the contract is not the "true" price. This is because transactions between relatives often involve discounts, gifts, or family arrangements that do not reflect the market value of the property.

The Risk: If the authorities investigate the transaction and conclude that the recorded price does not reflect market value, they may adjust the tax calculation basis, resulting in an additional tax claim, plus interest and penalties. This can occur years after the transaction is completed.

4. Family Risks and Inheritance Law

In transactions between relatives, particularly between parents and children, there is a significant family risk. If your parents sell you an apartment at a substantial discount, this may lead to family conflict with other siblings who may feel that they have been disadvantaged in the division of the inheritance or family preference.

The Risk: Other siblings may challenge the arrangement in family proceedings, claim that it was made without full awareness, or even claim that it constitutes misappropriation of parental assets. Furthermore, if one of the parents dies subsequently, the inheritance may be complicated if there was no clear legal arrangement.

5. Issues with Land Registry and Registration

Every real estate transaction must be registered with the land registry (Tabu). In transactions between relatives, there are often issues with documentation, signatures, or proof of identity, especially if the parties did not consult with an attorney beforehand.

The Risk: If the registration is not carried out properly, the transaction may be legally problematic, and the purchaser may not be able to exercise his or her rights as owner. Additionally, registration issues may lead to delays in mortgage loans or future transactions.

6. Implications for National Insurance and Social Rights

In transactions between relatives, especially if there is a substantial discount or a family loan, there may be an impact on social rights such as allowances, unemployment benefits, or previously obtained loans. The authorities may treat the transfer of the property as an increase in capital or income, which may affect other rights.

The Risk: If you receive a family loan in exchange for the property, or if it is a transaction at a substantial discount, this may affect your income declarations, social rights, or annual tax calculations.

Comparison: Real Estate Transaction Between Relatives vs. Transaction Between Strangers

To better understand the risks, let us compare a real estate transaction between relatives versus a transaction between strangers:

Practical Examples: Scenarios in Transactions Between Relatives

Scenario 1: Parent Sells to Child at Significant Discount

David sells a 4-room apartment to his son Eli for 800,000 NIS, while the market price is 1.2 million NIS. This represents a discount of 400,000 NIS.

The Risk: The tax authorities may argue that the "true price" is 1.2 million NIS and charge David capital gains tax on the 400,000 NIS difference. Additionally, Eli may be required to pay registration fees based on a higher price. Eli's siblings may feel disadvantaged and challenge the arrangement.

The Solution: David and Eli should consult with a real estate attorney, document that this is an intentional family discount (e.g., helping their son get back on his feet), and use a detailed sales agreement explaining the discount. Additionally, it is advisable to inform other siblings of the arrangement.

Scenario 2: Siblings Purchase a Shared Apartment

Two brothers, Ran and Dan, purchase a shared apartment for 1 million NIS. They split the price equally. However, Ran pays 200,000 NIS from his own income, while Dan obtains a family loan from their parents for 500,000 NIS.

The Risk: If the family loan is not documented in writing, Dan may claim in the future that it was a gift, not a loan. This could lead to significant family conflict. Additionally, if Dan cannot repay the loan, the parents may be in a weak legal position.

The Solution: A family loan should be documented in writing, including repayment terms, interest (if applicable), and repayment date. It is also advisable to consider a clear partnership agreement between Ran and Dan, detailing their rights in the apartment and the loan repayment terms.

Scenario 3: Family Loan Without Documentation

A grandmother lends her granddaughter 300,000 NIS to purchase a first apartment, without any contract or written documentation. The granddaughter makes partial repayments to the grandmother, but there is no formal agreement.

The Risk: If the grandmother passes away, the granddaughter may be required to repay the amount to the estate, which could lead to family conflict. Additionally, if the granddaughter wishes to sell the apartment in the future, the authorities may question the source of funds, which could trigger a tax investigation.

The Solution: Even between family members, it is essential to document a loan in writing, including repayment terms and interest. This protects both parties and reduces future legal risks.

Essential Steps to Complete a Real Estate Transaction Between Relatives Safely

Step 1: Preliminary Legal Consultation

Before starting anything, you should consult with an experienced real estate attorney. A good attorney will be able to help you understand the risks, plan the transaction correctly from a legal standpoint, and avoid costly mistakes.

Step 2: Professional Real Estate Appraisal

To avoid tax authority inquiries regarding "true price," it is advisable to obtain a professional appraisal of the real estate from a licensed real estate appraiser. This can serve as documentation of market value and demonstrate to the authorities that the registered price is reasonable.

Step 3: Legal Tax Planning

An attorney or tax consultant should calculate in advance the capital gains tax, purchase tax, and registration fees. This will help you understand the actual costs and plan your budget accordingly.

Step 4: Preparation of an Accurate Sales Agreement

The sales agreement should be detailed and clear, and include all the terms of the transaction. If there is a family loan, a significant discount, or another family arrangement, it must be documented in the agreement.

Step 5: Family Arrangement in Writing (if relevant)

If there is a family loan, a written loan agreement should be prepared, specifying the repayment terms, interest (if any), and repayment date. This can be a simple agreement between family members or a more formal agreement with witnesses.

Step 6: Notification to Other Family Members

Particularly in transactions between parents and children, it is advisable to inform siblings or other relatives of the arrangement to avoid future family disputes. This can be done through a simple letter or a family meeting.

Step 7: Registration at the Land Registry

After signing the sales agreement, the transaction should be registered at the Land Registry Office. An attorney should handle this process to ensure the registration is completed correctly and without issues.

Step 8: Capital Gains Tax Approval

If there is a capital gains tax liability, it must be reported to the tax authorities and the tax paid accordingly. This is essential to avoid penalties and interest in the future.

Why did you choose the office of Mandelbaum, Gur, Witzman-Gur and Co. for a real estate transaction between relatives?

A real estate transaction between relatives requires experienced and careful legal consultation. At the office of Mandelbaum, Gur, Witzman-Gur and Co., we have over 18 years of experience in real estate and property law, and we have guided dozens of clients through transactions between relatives in a safe and legal manner.

We understand the legal nuances, tax issues, and procedures required to protect your rights. We help you:

• Plan the transaction in a legally correct manner
• Prepare an accurate and clear purchase agreement
• Calculate appreciation tax, purchase tax, and registration fees
• Arrange family loans in writing
• Avoid family conflicts in the future
• Register the transaction in the Land Registry correctly

We offer a free initial consultation so we can understand your situation in privacy and offer the best solution. We are located in Ramat Gan and also in Petah Tikva, and we assist real estate buyers and sellers throughout the central region.