Israel Allows Capital Gains Tax Exemption on Inherited Homes Up to 5 Million Shekels

In Israel, heirs selling a single inherited residential property may qualify for a full exemption from capital gains tax (betterment tax) up to a sale value of 5,008,000 shekels in 2026. This exemption applies only if three cumulative conditions are met: the heir must be the spouse, descendant, or spouse of a descendant of the deceased owner; the deceased must have owned only one residential property at the time of death, with no partial ownership in any other property; and the tax authority must determine that the deceased would have qualified for the exemption if they had sold the property while alive. This special exemption differs from the regular exemption for sellers of a single home and is based on the deceased's status, not just the heir's.

The exemption ceiling is set within a scale valid from 2024 to 2027, and any sale amount exceeding 5,008,000 shekels is subject to regular capital gains tax. Heirs who do not meet these conditions may still explore other exemptions available to regular home sellers, though these cannot always be combined. The tax authority requires submission of a declaration of sale along with supporting documents such as a will, probate order, or inheritance certificate.

Special cases include heirs receiving replacement apartments under urban renewal projects like TAMA 38 or evacuation-reconstruction, who may retain exemption eligibility subject to meeting original conditions and specific tax authority review. Israel does not impose inheritance tax, but capital gains tax may apply upon sale of inherited property. The exemption is not limited to a one-time use and is assessed at the time of sale regardless of how much time has passed since the owner's death.

Heirs are advised to carefully verify the deceased's property holdings before applying and to follow guidelines for managing inherited assets prior to sale. The tax authority examines each heir's eligibility individually, and close relatives such as siblings or parents inheriting from children do not qualify for this exemption. Reporting the sale to the tax authority must be done within the legally prescribed timeframe after signing the sale agreement.