Court Rules Inherited Apartments Unfit for Tax Break

A new ruling by the Haifa Tax Appeals Committee has determined that two apartments, left vacant and in disrepair for over 30 years as part of an inheritance, do not qualify for a beneficial tax calculation on their sale. The apartments, originally intended by the deceased owner, Hannah Jacobi, to be used for vacations for mothers with many children, had deteriorated significantly. They were even granted an exemption from municipal property taxes (Arnona) by the Haifa Municipality, classified as ruined and empty properties.

When the executor of the estate sought to sell the apartments, they requested to apply the "linear calculation" for capital gains tax (Mas Shevach), a mechanism that significantly reduces the tax burden on older properties. This calculation offers a zero tax rate on gains accrued before 2014 for properties purchased before that year, with subsequent gains taxed at 25%. However, the Tax Authority denied this request, a decision later upheld by the appeals committee.

The committee cited two main reasons for its ruling. Firstly, the original will's stipulation for public use, where beneficiaries were not individually named and changed over time, meant the apartments did not meet the legal definition of a "residence" requiring individual ownership or lease. Secondly, and crucially for tax purposes, the committee found the apartments' physical condition on the day of sale rendered them unsuitable for residential use. Expert appraisals described them as unfit for habitation, with restoration costs estimated at half their market value. The very argument used to obtain the property tax exemption, that the apartments were ruined and unusable, was used as evidence against their classification as residences for capital gains tax purposes.

The ruling clarifies that for tax purposes, a property's physical state at the time of sale is paramount, even if it is legally registered as an apartment. Long-vacant, severely damaged, or properties requiring extensive renovation may be reclassified, directly impacting the capital gains tax owed. The committee dismissed the appeal but ordered the Tax Authority to adjust another aspect of the assessment related to depreciation, acknowledging that if the properties are not considered residences, the depreciation calculation also needs revision. The executor was ordered to pay 25,000 shekels in legal costs.