A Guide to Real Estate Transactions Between Relatives — Legal Risks You Must Know

Why Do Real Estate Transactions Between Relatives Require Special Legal Counsel?

A transaction between relatives in the real estate field is not as simple as it sometimes appears. Family members or close friends who conduct a sale or purchase of a property raise profound legal questions that many ignore until the problem is discovered at a late stage of the process. An agreement between close parties, without proper documentation, can be a source of future disputes, undefined legal debt, unforeseen tax consequences, and even transaction cancellation in court.

In our work at Mendelbaum, Gor, Witzman-Gor and Partners with real estate transactions since 2008, we have repeatedly witnessed the same pitfalls: relatives assuming they know the way because they are family; misunderstandings about the division of costs and taxes; mistaken assumptions about inheritance rights or future claims; and failure to assess ongoing tax and registration implications.

This guide explains the main legal risks in real estate transactions between relatives, the required process, common pitfalls, and the steps you must take to protect yourself and the property.

What is Capital Gains Tax in a Transaction Between Family Members?

Capital gains tax is a tax imposed by the state on profit received from the sale of a property (apartment, land, building) when the price at which the property is sold is higher than a defined "base value." Even when the transaction is between relatives, capital gains tax still applies — and this is one of the greatest legal risks that people ignore.

In a transaction between family members, the tax can be particularly high because most cases involve a discount or pricing below market value. For example, if a father sells an apartment to his son for 500,000 shekels, but the true market value of the apartment is 800,000 shekels, capital gains tax will still apply to the difference — unless there is a special legal basis (such as a full gift or an agreed family discount with proper documentation).

The Israeli Tax Authority carefully examines transactions between relatives to ensure that tax evasion does not occur. Therefore, there is critical importance to proper documentation of the sales agreement, pricing, and legal justification for any discount or special condition.

The Main Legal Risks in Transactions Between Relatives

1. Lack of a Written and Clear Agreement

The greatest risk in transactions between relatives is reliance on an oral understanding alone. Many assume that because they are family, there is no need for a formal sales contract or written agreement. This is entirely wrong. Without a signed sales contract registered with the Tabo (National Land Registry), the transaction may be subject to change, cancellation, or even questions about the buyer's legal rights to the property.

Additionally, if the seller dies before the registration is completed, the property may be included in his estate, creating disputes with other heirs. If the buyer does not receive a deed (a legal document transferring ownership), he may not be recognized legally as the owner, even if he paid the full price.

2. Questions About Capital Gains Tax and Family Discounts

As mentioned, capital gains tax applies even in transactions between relatives. However, the law allows certain discounts in cases of certain family transactions (such as a sale from a son to a father at a reduced price in the spirit of family). However, any such discount requires clear legal documentation and also a declaration on a properly completed capital gains tax form.

If you did not properly document the discount or did not declare it to the Tax Authority, you may encounter a tax audit, a demand for payment with surcharges and interest, and a retroactive review of previous transactions.

3. Problems in Assessing Property Value

In a transaction between relatives, the value of the property may be unclear. If the seller claims to have sold for 500,000 shekels and professional valuation shows a value of 700,000 shekels, the Tax Authority may exercise discretion and impose tax on the difference. This creates a legal problem that may last for years.

To avoid this, it is recommended to conduct a professional property valuation before signing the sales contract, thereby creating documentation that can demonstrate to the Tax Authority that the pricing was fair and based on fact.

4. Implications for Inheritance Rights and Asset Distribution

When a person sells a property to one of their children at a substantial discount, it may affect the rights of other heirs. If a father sells an apartment to his son at half its value, other daughters may claim that this is also a gift and therefore should affect the distribution of the inheritance. This creates complicated family and legal disputes that may last for years.

5. Problems in Documentation and Transfer of Ownership

If the transaction is not properly documented, the buyer may not be able to prove legal ownership of the property. This may affect their ability to take out a mortgage on the property, sell it in the future, or even live in it legally. Additionally, if the seller dies, heirs may claim that the transaction was not completed properly and seek to reclaim the property.

Comparative Table: Family Transaction Scenarios

Common Pitfalls to Avoid

1. Significant Discount Without Documentation

If selling a property at a significant discount (e.g., 30-50% of fair market value), you must document this clearly in writing. If you fail to do so, the tax authority may impose tax on the full market value, creating an unexpected financial demand.

2. Failure to Register with Land Registry

Many assume that payment and an oral agreement are sufficient. This is not the case. Without land registry registration, the buyer is not the full legal owner of the property and cannot sell it, lease it, or use it as collateral for a loan.

3. Ambiguity Regarding Heirs' Rights

If the seller dies before registration is completed, other heirs may claim they own part of the property. This can lead to complicated family disputes and transaction cancellation.

4. Failure to Address Capital Gains Tax

It is important to understand that capital gains tax applies to transactions between family members as well. If you fail to pay it properly, the tax authority will demand payment with penalties and interest retroactively.

5. Lack of Professional Valuation

If the pricing is not based on professional valuation, it is easy for the tax authority to claim the pricing is unfair. This creates a legal issue that may last for years.

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

Through our work with real estate transactions since 2008, we have witnessed the same legal pitfalls in transactions between relatives repeated many times over. We understand that a transaction between family members is sometimes sensitive, but that is precisely the time when legal clarity and proper documentation must be maintained.

Our real estate and property attorneys can guide you at every stage of the transaction:

• Sales Agreement Drafting — A precise, detailed, and legally executed agreement that defines all terms and obligations.
• Professional Property Valuation Coordination — Conducting a property appraisal by a licensed appraiser to ensure that pricing fairly reflects market conditions.
• Capital Gains Tax Report Submission — Filing a capital gains tax form with the tax authorities, with proper documentation of any discount or special arrangement.
• Settlement of Family Rights — Examination of implications for inheritance rights, third-party rights, and settlement of any potential family dispute.
• Land Registry Registration — Execution of the property registration in the buyer's name at the State Registration Office, ensuring full legal rights.
• Ongoing Legal Counsel — Legal guidance throughout the entire process to avoid legal or tax traps that may arise.

We believe that a properly executed legal transaction is the foundation for long-term success. Therefore, we invest time in understanding the unique circumstances of each transaction, reviewing every detail to ensure that each party is protected and all legal pitfalls are eliminated.

Schedule a Free Consultation Meeting

If you are in the process of a real estate transaction between relatives, or if you are considering such a transaction, we recommend that you schedule a free consultation meeting with our attorneys. In this meeting, we will hear the circumstances of your transaction, examine the relevant legal risks, and offer you a clear action plan to protect yourself and your property.

Our office is located in Ramat Gan, and we also have a branch in Petach Tikva. You can schedule a meeting at the branch most convenient for you, or speak with one of our attorneys by phone. We are here to help you navigate this complex transaction safely and clearly.