Sale of an inherited apartment and exemption from capital gains tax
A relative of yours has passed away and left you an apartment or other real estate property. InheritanceCases like this and others occur in Israel every day.
Sometimes the need arises to sell an apartment or real estate that has been inherited by a relative. In the interesting review before you, I explain Editor Justice Sharon Segal The legal way to sell inherited real estate, while receiving an exemption from paying capital gains tax in accordance with the laws of the State of Israel.
Section 4 of the Real Estate Taxation (Appreciation and Acquisition) Law, 5723-1963 states that receiving real estate by inheritance is not considered a sale of real estate for the purposes of the law, and therefore this is an action that is exempt from tax liability under the law, including appreciation tax or acquisition tax.
However, if the heirs wish to sell the real estate property they inherited, then this is an act of selling real estate for the purposes of the law, as stated in Section 5(c)(1) of the law, which is also subject to tax payment according to the law, except in the case where the property was transferred/sold between the heirs themselves, and its consideration was paid from the estate funds, as stated in Section 5(c)(4) of the law.
This section states that the distribution of estate assets between heirs, whether made before the registration of a succession order or a maintenance order, Will , and whether it was made after the aforementioned registration, it will not be considered a sale, except in the case where, as part of the division, consideration was given in money, or in money’s worth, which is not an asset that is included among the assets of the estate, in which case the part of the estate for which the consideration was given will be considered as having been sold.
That is, the transfer and/or sale of rights in real estate between the heirs themselves is an exchange transaction that is not subject to tax, as long as the consideration for the apartment was paid from the estate funds, as part of the distribution of the estate assets among the various heirs.
If it is not possible to pay the heir for his rights in the apartment from the estate funds, but an external source of financing for the estate is also needed, such as: Mortgage, The transaction will be considered a sale of real estate for the purposes of the law and the parties to the transaction will be required to pay taxes according to the law.
This section also states that the estate of two testators will be considered a single estate that can be divided before the terms of the section, provided that before their death the testators were a couple or had a child and a parent, and provided that the division of the estates has not yet been completed.
Therefore, if the property is sold between the heirs themselves under the terms of Section 5(c)(4) of the Law, this is an action that does not constitute a sale for the purposes of the Law and is therefore exempt from tax.
In any other case, the action in question constitutes a sale for the purposes of the law, and is therefore taxable. In such a situation, a distinction must be made between a case in which the property is a qualifying residential apartment and a case in which it is not, as will be explained to them.
The sale of real estate that is a qualifying residential apartment
If the inherited real estate is a qualifying residential apartment, an exemption from capital gains tax for the qualifying apartment may be requested at the time of its sale, in accordance with Section 49B(5) of the Law.
In this context, it should be clarified that although Amendment 76 to the Law generally brought about a comprehensive reform with regard to exemptions from capital gains tax on the sale of a residential apartment, it did not change the exemption path upon the sale of a residential apartment that was inherited, so this path remained as it was.
In order for an inherited residential apartment to be defined as a qualifying residential apartment, it must meet the conditions for the definition of a qualifying residential apartment under Section 49(a) of the Law. According to these conditions, the apartment in question is an individually owned apartment, which is not business inventory, its construction has been completed and it is intended and used for residence, and it has been used for residence for the past 4 years or 80% of the period for which the appreciation is calculated.
In addition, the seller must sell all rights in the apartment, as stated in Section 49A of the Law. In addition, the exemption was limited in each case to a total of NIS 4.5 million, with the balance regarding apartments whose equity exceeds this amount, being taxed at a preferential rate, according to the linear calculation, as stated in Section 49A(a1) of the Law.
To receive an exemption from capital gains tax upon the sale of a qualifying residential apartment that was inherited, it must meet all the cumulative conditions set forth in Section 49B(5) of the Law, as detailed below:
- The seller is the spouse of the testator, or a descendant of the testator, or the spouse of a descendant of the testator, as stated in Section 49B(5)(a) of the Law. That is, the exemption does not apply, for example, to a parent who inherits his child, or to other heirs specified in the will who are not among these heirs..
- Before his death, the testator was the owner of only one residential apartment, as stated in Section 49B(5)(b) of the Law.
- If the testator were still alive and were to sell the residential apartment, he would be exempt from tax on the sale, as stated in Section 49B(5)(c) of the Law. In other words, the meaning is that the heir steps into the shoes of the testator for the purposes of the exemption and is therefore entitled to receive the exemption to which the testator would have been entitled if he had been alive.
In order to receive this exemption, the number of apartments that the testator himself owns is of no importance. Also, the mere possession of an apartment received by inheritance does not prejudice the heir’s right to receive a qualifying apartment exemption under Section 49B(2) of the Law, upon the sale of another apartment owned by the heir, to the extent that he has such an exemption.
The reason for this is that Section 49C(4) of the Law states that for the purpose of the exemption of a qualifying apartment under Section 49B(2) of the Law, the apartment being sold will be considered the only residential apartment the seller has, even if he also has an apartment that was inherited, in which the conditions of Section 49B(5)(a) + (b) were met.
In addition, the mere receipt of the capital gains tax exemption for the sale of an inherited apartment does not preclude receipt of the exemption that the heir is entitled to receive under the law for the sale of another apartment he owns.
The sale of real estate that is not a qualifying residential apartment
If the inherited real estate property is a plot of land or a commercial building, or if it is a residential apartment that is not a qualifying residential apartment or does not meet the conditions of Section 49B(5) of the Law, capital gains tax must be paid upon its sale according to the law.
In order to calculate the appreciation according to the law, it is necessary to determine, among other things, the purchase value of the inherited property, and the date of purchase, according to the date of the testator’s death:
If the testator died before April 1, 1981 – Then, in accordance with Section 26 of the Law, the purchase value will be determined according to the value of the property on the date of the testator’s death, and in accordance with Section 37(f) of the Law, the purchase date will be determined as the date of the testator’s death.
If the testator died on or after April 1, 1981 – Then, in accordance with Section 26 of the Law, the purchase value will be determined as the purchase value under the Real Estate Taxation Law if the property had been sold by the testator, and in accordance with Section 37(g) of the Law, the purchase date will be determined according to the day that would have been determined as the purchase date if the testator had sold the property.
After determining the purchase value and the date of purchase, the capital gains tax must be calculated according to the remaining provisions of the law, including taking into account the deduction of expenses incurred by the testator and/or heir for the purpose of purchasing and/or selling the property, which can be recognized according to Section 39 of the law.
