Families in Israel who own significant real estate assets — residential apartments, commercial properties, plots of land, or income-producing real estate — face complex legal and tax challenges when transferring these assets to the next generation.
Early and precise real estate tax planning can save hundreds of thousands of shekels (and often much more), ensuring that family assets remain within the family with minimal tax exposure.
In this article, we will outline the main tax-planning options available under Israeli law and demonstrate, through real-life examples, how smart structuring can lead to significant savings in capital gains tax (Mas Shevach) and purchase tax (Mas Rechisha) during intergenerational transfers of real estate.
Which Taxes Apply to Intergenerational Transfers of Real Estate?
When transferring real estate without consideration (as a gift), two main taxes generally apply in Israel: Capital Gains Tax (Mas Shevach) and Purchase Tax (Mas Rechisha). However, the law provides significant relief for transfers between relatives.
Capital Gains Tax (Mas Shevach):
Ordinarily, the sale of real estate is subject to capital gains tax on the profit realized between the purchase price and the sale price. However, when the property is transferred without consideration to a relative (such as a spouse, child, parent, sibling, grandchild, etc., as defined in the Real Estate Taxation Law), the transfer may qualify for a full exemption under Section 62 of the Real Estate Taxation Law.
It is important to note that this exemption actually constitutes a deferral of tax—the recipient steps into the shoes of the transferor, inheriting their original acquisition date and cost basis. Therefore, if the recipient later sells the property, capital gains tax will be calculated as if they had acquired the property on the date and at the cost of the original owner.
Purchase Tax (Mas Rechisha):
The recipient of the gift is generally liable for purchase tax. Nevertheless, under Regulation 20 of the Real Estate Taxation Regulations (Betterment and Purchase), transfers between relatives enjoy a significant reduction: the purchase tax is limited to one-third of the regular rate that would apply in a standard purchase for consideration.
If the transfer does not qualify as one between “relatives” under the law, or if the relationship does not meet the required conditions (for example, spouses not living together in practice), the full purchase tax applies.
Proper advance planning of the transfer can substantially reduce tax liability and prevent future complications—especially when considering future sales or estate and inheritance arrangements.
Early Planning – When Is It Worth Transferring Property to Your Children as a Gift?
Transferring real estate to children as a gift during the parents’ lifetime allows families to take advantage of the existing tax benefits.
For example, parents who transfer an apartment to a child who does not own any other property can minimize — and sometimes eliminate — capital gains tax if the apartment qualifies as the child’s sole residence.
Case Study:
A family that owned three apartments decided to transfer one high-value apartment to their son.
Had he purchased the apartment himself, he would have paid substantial purchase tax.
Thanks to the gift structure, the purchase tax was reduced to approximately one-third of what it would have been in a standard sale.
Another apartment was transferred to a different child, and the parents retained one residence — which, upon inheritance, will qualify for a full capital gains tax exemption as a single residential property.
Using the Inheritance Exemption from Capital Gains Tax (Rather Than a Gift)
One of the most effective tax-planning strategies is to maximize the capital gains exemption available for a residential property received through inheritance.
This exemption applies if three cumulative conditions are met:
- The property was the deceased’s sole residential property.
- The heirs are the deceased’s spouse or direct descendants.
- The deceased would have been exempt from capital gains tax had they sold the property while alive.When properly planned, this structure allows heirs to sell the inherited property completely tax-free.
Example:
Parents left a valuable apartment in Tel Aviv worth approximately 4 million NIS to their three children.
Because it was their only residential property and met all the conditions for exemption, the children sold it after inheritance without paying any capital gains tax, saving roughly 1 million NIS compared to a gift transfer during the parents’ lifetime.
How to Perform Proper Real Estate Tax Planning for Intergenerational Transfers
Professional real estate tax planning requires a combination of legal expertise, tax proficiency, and a holistic understanding of family wealth management.
The recommended process includes:
- Comprehensive analysis of the family’s real estate portfolio and potential tax exposure.
- Defining family goals and individual needs of all family members.
- Preparing a detailed legal and tax plan, maximizing all available exemptions and reliefs under Israeli law.
- Ongoing professional guidance throughout the implementation of the transfer.
In Conclusion: Early Planning Saves Real Money
An intergenerational real estate transfer can either become a costly tax event — or a strategic opportunity to save substantial amounts while preserving family wealth.
With early, careful, and professional planning, you can ensure that the next generation enjoys the full value of your real estate holdings without unnecessary tax burdens or loss of value.
Our firm specializes in strategic family wealth management and real estate taxation, offering comprehensive and personalized legal guidance to families seeking to transfer real estate assets to the next generation in the most efficient and beneficial way.
The information above is for general purposes only and does not constitute legal advice. Each case requires individual assessment according to its specific circumstances.
