Selling an Inherited Apartment and Capital Gains Tax — A Complete Legal Guide

Selling an Inherited Apartment — A Comprehensive Legal Guide

When an heir inherits an apartment or other real estate property, selling the asset involves a series of legal steps, tax management, and registration updates. Selling an inherited apartment is not as straightforward as a regular sale by an owner who purchased the property themselves — you must deal with questions of heirs' rights, capital gains tax, inheritance expenses, and priority order for debt payment.

In this guide, we will review all the necessary steps, from the day you receive the property through inheritance until its transfer to the new buyer, including calculating capital gains tax on inheritance, heirs' rights, legal costs, and avoiding common mistakes that may lead to lawsuits or legal proceedings.

What is Inheritance of a Real Estate Property?

Inheritance of a real estate property (apartment, house, land) begins when the property owner passes away. According to Israeli inheritance law, the property passes to the canonical heirs (usually close family members) or according to the will's provisions if one exists. Until the property is registered in the heirs' names at the Land Registry (at the registration office), it is considered part of the deceased's estate assets.

Any heir whose share in the inheritance exceeds a certain amount (usually above a minimum amount set by law) is entitled to file a request for registration in his or her name in the land registry (taboo deed). Only after this registration can the heir sell the property, rent it out, or perform other legal actions on it.

Capital Gains Tax on Inheritance — How to Calculate?

Capital gains tax is a tax imposed on the profit created between the property's value at the time of the original owner's purchase and the property's value at the time of its sale. However, in inheritance, the situation is somewhat different. When an heir inherits an apartment and sells it, capital gains tax is calculated on the difference between the property's value on the date of the deceased's death and the sale price.

This means that if an apartment is worth 2,000,000 shekels on the date of death, and the heir sells it for 2,200,000 shekels a year later, capital gains tax will apply only to the difference of 200,000 shekels. The rate of capital gains tax varies depending on the percentage of appreciation set by law, and is usually in the range of 10% to 30% of the profit, depending on the circumstances.

Procedure Steps — From Inheritance to Sale

The process of selling an inherited apartment involves several important steps:

• Filing a Request for Land Registry Registration: After the property owner's death, a request must be filed to register the heirs in their names at the Land Registry office. This process requires documents such as a death certificate, a probate order (if a will exists), a Bank of Israel certificate (for properties subject to liens), and additional documents depending on the circumstances.
• Property Valuation: It is important to determine the property's value on the date of the deceased's death for the purpose of calculating capital gains tax. This can be done by a licensed real estate appraiser or according to the tax authority's assessment.
• Determining the Sale Price: After the heirs are registered, you can begin searching for a buyer and determining the sale price.
• Signing a Purchase Agreement: As with any sale transaction, a purchase agreement must be signed detailing the transaction terms, sale price, delivery date, and other conditions.
• Paying Taxes and Obligations: Before transferring the property to the buyer, a certificate must be obtained from the tax authority (debt-free certificate) and all debts related to the property must be settled (municipal taxes, water, electricity, etc.).
• Registering the Buyer in the Land Registry: At the final stage, the new buyer is registered in the land registry as the new owner of the property.

Heirs' Rights in Selling an Inherited Apartment

Any heir whose share in the inheritance is significant is entitled to his or her proportional share of the profit generated from the sale. For example, if there are three equal heirs (each 1/3), and the profit from the sale is 300,000 shekels, each heir is entitled to his or her share of 100,000 shekels (before taxes). However, there are cases where heirs' shares differ from each other, depending on the will or inheritance law.

It is important to note that not every heir is permitted to sell the property alone. Generally, each heir needs the consent of the other heirs before a sale. If one of the heirs objects, a request can be filed with the court under the Property Law (Inheritance) for division of the property or its sale with the consent of the majority.

Costs and Taxes When Selling an Inherited Apartment

When selling an inherited apartment, you must account for a series of costs and taxes that will reduce the heirs' final profit. Understanding these costs in advance is important for proper financial planning.

Capital Gains Tax — Accurate Calculation

Capital gains tax is calculated on the profit generated between the property's value on the date of the deceased's death and the actual sale price. The rate varies according to the percentage of appreciation set by law, and is typically in the range of 10% to 30% of the profit. It is important to note that capital gains tax is paid on the profit only, not on the entire sale price. For example, if an apartment is worth NIS 2,000,000 on the date of death and is sold for NIS 2,200,000, capital gains tax applies only to the additional NIS 200,000.

In some cases, there are discounts or exemptions from capital gains tax. For example, if the property was used as the deceased's primary residence, or if the heir is a retiree, certain discounts may apply. However, each case is reviewed individually, and the final decision rests with the tax authorities.

Purchase Tax (if applicable)

Typically, an heir who receives a property through inheritance does not pay purchase tax on the inheritance itself. However, if the heir sells the property within two years of the inheritance being registered, they may be liable for an additional purchase tax at a certain rate. This depends on the specific conditions of the case and the tax authorities' guidelines during the relevant period.

Legal Fees and Administrative Costs

Legal fees include attorney fees for document preparation, guidance through proceedings, and coordination with the tax authorities and the Land Registry. These costs vary depending on the case's complexity, the number of heirs, and can range from several thousand shekels to tens of thousands, depending on the circumstances. Additionally, costs must be calculated for a real estate appraiser to evaluate the property, Land Registry registration fees, bank fees, and data company fees (if using brokerage services).

Liabilities on the Property

Before selling the property, you must ensure there are no outstanding liabilities in the name of the deceased or the heirs on the property. This includes municipal taxes, water, electricity, shared kitchen fees (if the property is in a shared building), insurance costs, etc. Any unpaid debt can delay the new buyer's registration at the Land Registry. Therefore, it is important to obtain a clearance certificate from the tax authorities and other relevant bodies.

Typical Cost Comparison Table

Common Mistakes When Selling an Inherited Apartment

There are several common mistakes heirs make when selling an inherited apartment:

• Failure to register at the Land Registry before sale: Attempting to sell a property without the heirs being registered at the Land Registry can lead to significant delays and legal complications. The registration at the Land Registry office must be completed first.
• Lack of consent from all heirs: If there are multiple heirs, each has rights to the property. Selling without their consent can lead to lawsuits and transaction cancellation.
• Incorrect capital gains tax calculation: Errors in calculating capital gains tax can lead to delays in the sale and additional charges from the tax authorities.
• Failure to settle liabilities on the property: Selling a property with debts in the deceased's name can delay the new buyer's registration and lead to legal complications.
• Failure to obtain legal advice: Inheritance and real estate sales involve many legal complexities. Failing to obtain legal advice from an experienced attorney can lead to costly errors.

Why is it important to obtain legal advice when selling an apartment through inheritance?

Selling an apartment through inheritance is a complex process involving a series of legal, tax, and administrative steps. One of the most common mistakes is attempting to manage the process without professional legal advice. This can lead to costly mistakes, significant delays, legal complications, and even substantial financial loss.

An attorney experienced in inheritance and real estate law can assist at every stage of the process: he will ensure that all land registry registrations are performed correctly, calculate capital gains tax accurately, assist in settling debts on the property, update all heirs about their rights and obligations, and protect their rights in case of disputes between heirs. Additionally, an attorney can identify tax reductions or exemptions from capital gains tax that may be significant from a financial perspective.

Mandelbaum, Gor, Witzman-Gor & Partners — Professional legal advice in inheritance and real estate law

Mandelbaum, Gor, Witzman-Gor & Partners is a boutique family law firm specializing in inheritance, real estate, and property law. The firm was established in 2008 by Attorney Keren Mandelbaum and has extensive expertise in the relevant areas of law for over 18 years.

When selling an apartment through inheritance, Mandelbaum, Gor, Witzman-Gor & Partners will provide comprehensive and focused legal advice on the following matters:

• Managing the process of registering heirs in the land registry in their names
• Accurate calculation of capital gains tax on inheritance
• Identifying tax reductions or exemptions from capital gains tax
• Drafting a purchase agreement that protects the heirs' rights
• Settling debts on the property
• Guidance on the rights and obligations of each heir
• Representation in legal proceedings in case of disputes between heirs

Mandelbaum, Gor, Witzman-Gor & Partners offers a first consultation meeting at no cost. During this meeting, an attorney at the firm can explain all the steps of the process, answer questions, and provide an initial assessment of the circumstances. This enables you to make an informed decision about continuing with the firm.

Mandelbaum, Gor, Witzman-Gor & Partners is located in Ramat Gan and serves clients from throughout the central region, including Petach Tikva. You can call the firm or leave your details to schedule a meeting, and the firm's staff will get back to you promptly.