Divorce Property Transfers Offer Tax Break Now, Costly Later

In Israel, transferring a property between divorcing spouses or from a parent to a child as part of divorce proceedings is exempt from capital gains tax and purchase tax. This exemption, based on Section 4a of the Real Estate Taxation Law, even waives the reporting requirement for the transfer itself.

However, this tax relief comes at a future cost. When the recipient eventually sells the property, the capital gains calculation will be based on the original purchase price and date from the transferring spouse, not the property's value at the time of divorce. This means any appreciation accumulated over decades of marriage will be attributed to the new owner, potentially resulting in hundreds of thousands of shekels in future taxes.

This rule applies to transfers of real estate rights or rights in a real estate association, provided they are made according to a court order issued in the context of divorce proceedings. Common scenarios include one spouse transferring their share of the marital home to the other, transferring the home to children, or transferring rights in a company holding real estate.

The tax continuity principle means the original purchase date and price are carried forward. For instance, a property bought for 900,000 shekels, valued at 2 million during a divorce and later sold for 2.25 million, will be taxed based on the initial 900,000 shekel purchase price, with the entire capital gain taxed upon the subsequent sale.

Transfers to children follow the same tax continuity. Children inherit the original purchase date and price, and the capital gain will be due when they sell. This is particularly important if the child already owns another property, as their personal purchase tax brackets will apply. The exemption is strictly tied to court orders explicitly referencing divorce proceedings, not merely court-approved settlement agreements for property disputes. The precise wording of the court order is crucial for determining tax liability.

The "family unit" presumption for purchase tax purposes continues even after separation. Section 9 of the law treats a buyer, their spouse, and children under 18 as a single buyer. An exception exists for a spouse permanently living separately, requiring documentation like a prenuptial agreement, separate residence, and financial separation proof to establish a new cost basis for the buyer.