Real Estate Transaction Between Family Members: Legal Risks You Must Know About

Why Real Estate Transactions Between Family Members Require Expert Legal Counsel?

A real estate transaction between family members — whether between parent and child, between siblings, or between spouses — is not an ordinary transaction. Under the law, such a transaction involves significant legal risks that many overlook until it is too late to correct them. Capital gains tax, repayment obligations, improperly documented family loans, damaged inheritance rights, and more — all of these can turn a transaction that seemed simple into an expensive family dispute and legal conflict.

In our experience of more than 18 years in real estate and property law, we have seen many couples, siblings, and family members encounter problems that should never have occurred. These problems happened because they did not consult with an experienced real estate attorney before signing the contract, but only after the transaction had already become a problem. On this page, we will educate you about the main risks, ways to protect yourself, and things that everyone involved in a real estate transaction between family members must know.

The Main Legal Risks in a Real Estate Transaction Between Family Members

When a relative sells a property to another relative, it is even more important that the transaction be properly documented and recorded accurately. Here are the main risks you need to be aware of:

What is Capital Gains Tax and How Does It Affect Transactions Between Relatives?

Capital gains tax is a tax paid by the seller of a property on the profit realized from an increase in the property's value. The profit is calculated as the difference between the sale price and the base value of the property (usually the original purchase price, adjusted according to the consumer price index).

Example: If you purchased an apartment for 500,000 shekels 20 years ago and now sell it for 800,000 shekels, the profit is 300,000 shekels. Capital gains tax is levied on this profit at a rate that is updated annually (typically ranging from 25%-35%, but this varies).

In a transaction between relatives, the problem is that many assume that if they sell at a lower price or by family agreement, there is no tax liability. This is not true. The tax authority may assess the property according to its fair market value, even if the price in the contract is lower. If the tax authority believes that the contract price does not reflect fair market value, it may challenge the price and levy capital gains tax on the difference.

How to Protect Yourself: It is important to consult with a real estate attorney or experienced accountant before signing the contract. If you are selling at a substantial discount, it is important to have a clear legal justification for this (for example, a family loan, or as part of asset division in a divorce). Without this, the tax authority may levy capital gains tax on a larger amount than you expected.

Family Loans: How to Document Them Properly

A family loan is any sum of money lent by one relative to another, usually on better terms than a bank (without interest, or at low interest rates). However, a family loan that is not properly documented can be a source of family disputes and legal problems.

Problems That Can Arise If a Loan Is Not Documented:

• In Inheritance Proceedings: If the lender dies and other heirs want to know whether this loan was a gift or a loan, this can lead to a challenge to the inheritance. If the loan is not documented, it may be considered a gift, which could reduce the borrower's share of the inheritance.
• In Divorce Proceedings: If one spouse borrows money from their parents and a divorce begins, there may be a dispute over whether this loan affects asset division or alimony payments.
• In Tax Calculations: If a family loan is not documented, the tax authority may treat it as a gift, which could affect capital gains tax or other taxes.
• In Cases of Non-Repayment: If the lender decides they do not want to repay the money, without a legal document, it will be very difficult to prove that there was a loan and not a gift.

How to Properly Document a Family Loan:

• Family Loan Agreement: It is important to have a written agreement between the lender and borrower that specifies the loan amount, repayment terms, whether there is interest, and when repayment is expected. This agreement must be signed by both parties willingly.
• Documentation of Payments: Each payment should be documented, usually through a bank transfer (not in cash), so that there is clear evidence of the payments.
• Mortgage Update: If the family loan is part of a real estate transaction (such as the purchase of an apartment), it is important to have a clear mortgage on the property or a written agreement that specifies the terms.

Sales Agreement Between Relatives: What Should It Include?

A sales agreement between relatives should be precise and clear, and no less important than a sales agreement between strangers. Here is what the agreement should include:

• Identity of the Parties: Full names, identification numbers, and addresses of the seller and buyer.
• Property Description: Accurate address, land registration number, property area, and any other relevant details.
• Sale Price: The exact price, including payment terms (such as: in cash, by bank transfer, in installments).
• Special Conditions: If there is a family loan, a parent's right to residence, or any other condition, this should be explicitly stated in the agreement.
• Cost Allocation: Who pays for registration costs, taxes, legal fees, etc.
• Rights and Waivers: If one party waives rights (such as inheritance rights or the right to reside in the property), this should be explicitly stated.
• Date of Property Possession: The date on which the property passes to the buyer, and who is responsible for maintenance costs until that date.

Comparison Table: Different Scenarios in Real Estate Transactions Between Relatives

Real Estate Transactions Between Relatives: Proper Legal Procedure Steps

To ensure that a real estate transaction between relatives is conducted safely and legally, it is important to follow a clear legal process:

Step 1: Early Legal Consultation — Before anything else, it is important to consult with an experienced real estate attorney. The attorney will be able to explain the risks, the rights of each party, and ways to protect yourself.

Step 2: Property Appraisal — It is important to have a formal property appraisal to provide a clear basis for calculating capital gains tax and dealing with the Tax Authority.

Step 3: Written Agreement — The purchase agreement should be precise, clear, and signed by both parties. If there is a family loan, there should be a separate loan agreement.

Step 4: Title Registry Check and Liens — It is important to verify that the property is registered in the Land Registry under the seller's name and that there are no liens or mortgages on the property.

Step 5: Filing with Tax Authority — It is important to file notice with the Tax Authority regarding the transaction to calculate capital gains tax correctly.

Step 6: Registration at the Land Registry — After all taxes and fees are paid, the property will be registered in the Land Registry under the new buyer's name.

Real Estate Transactions Between Family Members: Why It's Important to Proceed with Care and Professionalism

A real estate transaction between family members is more than just a legal transaction — it's a family matter. Therefore, it's important that it be conducted in a way that preserves family relationships while protecting the legal rights of each party. When a transaction is not properly documented, or when one party feels misunderstood or hasn't given full consent, it can lead to a family conflict that is not only costly legally but also causes real family damage.

In our experience of over 18 years in real estate law, we have seen many families separate due to real estate transactions that were not properly documented. This doesn't have to be the case. With proper legal advice, you can conduct a safe transaction, legally clear, and one that preserves family relationships.

How Mendelbaum, Gor, Witzman-Gor & Co. Can Help You

Our firm specializes in real estate and property law, and we have handled hundreds of cases involving real estate transactions between family members. We understand the legal risks, the family dynamics, and we know how to help you protect your interests in a way that preserves relationships.

Our services include:

• Early legal advice: Before starting a transaction, we meet with you and explain the risks, the rights of each party, and the ways to protect yourself.
• Drafting strong legal agreements: We draft sales agreements, family loan agreements, and other agreements that protect your interests clearly and accurately.
• Navigating the tax system: We work with accountants to correctly calculate capital gains tax and deal with the tax authority.
• Registration at the Land Registry: We handle the entire process of registering the property in the Land Registry under the new owner's name, ensuring the transaction is conducted legally and clearly.
• Dispute resolution: If there is a family dispute over a real estate transaction, we can help you resolve it through negotiation or court.

We believe that everyone is entitled to expert legal advice, which is why we offer a free initial consultation. In this meeting, we listen to your story, explain the risks, and offer you ways to protect yourself.