Step one: inheriting costs nothing
The Land Taxation Law is unusually blunt about this. Section 4 reads, in full: "הורשה איננה מכירה או פעולה באיגוד לענין חוק זה" — an inheritance is not a sale for the purposes of this law.
That single sentence does most of the work. Section 9(a) charges purchase tax only "במכירת זכות במקרקעין" — on a sale of a right in land. No sale, no charge. It is worth being precise about the mechanism: this is not an exemption from purchase tax. The charge never attaches in the first place, which is a stronger position than an exemption and does not depend on your meeting any conditions.
Dividing the estate between heirs is also outside the charge. Section 5(c)(4) provides that the division of estate assets among heirs is not treated as a sale — with one limit: if consideration is paid in money or in kind "שאינו נכס הנמנה עם נכסי העזבון", from outside the estate, that portion is treated as sold. Siblings can reallocate the estate's own assets among themselves freely; the moment outside cash equalises the split, that slice becomes a taxable sale.
Step two: the basis comes with the apartment
Here is where the bill is created, years before anyone thinks about it. Israeli law turns on a single date — 1 April 1981. Before it, section 26(a)(1) still looks to estate-tax valuations where one was made; from that date onward the statute drops them entirely and looks only to the deceased.
| The deceased died | Acquisition value (שווי הרכישה) | Acquisition date (יום הרכישה) |
|---|---|---|
| Before 1 April 1981 | Value at the date of death — s.26(a)(1) | Date of death — s.37(1)(f) |
| On or after 1 April 1981 | What it would have been had the deceased sold it — s.26(a)(2) | The date it would have been had the deceased sold it — s.37(1)(g) |
Section 26(a)(2) is explicit: "השווי שהיה נקבע לפי חוק זה אילו נמכרה בידי המוריש". And section 37(1)(g) does the same for the date: "היום שהיה נקבע כיום הרכישה אילו מכר אותה המוריש".
So for essentially every death in living memory, you inherit the flat and its entire history. A Tel Aviv apartment bought in 1975 and inherited in 2024 still has a 1975 acquisition date and a 1975 acquisition value when you sell it in 2026. Half a century of appreciation is yours to be taxed on.
Step three: the United States does precisely the opposite
IRC §1014(a)(1) sets the basis of property acquired from a decedent at "the fair market value of the property at the date of the decedent's death", and §1014(b)(1) applies that to "property acquired by bequest, devise, or inheritance".
Two points that matter for a foreign inheritance, and both are negatives worth stating explicitly:
- §1014(b)(1) carries no US-estate condition. The requirement that property be "required to be included in determining the value of the decedent's gross estate" appears in §1014(b)(9), a different paragraph. A straightforward bequest travels under (b)(1).
- §1014 contains no carve-out for a foreign decedent. We searched the section for "nonresident", "non-resident" and "alien". There are none.
The result is a step-up: for US purposes the apartment's basis is reset to its market value on the day the deceased died.
The mismatch, in one line
| Israel | United States | |
|---|---|---|
| Basis on inheritance | Carries over from the deceased | Steps up to date-of-death value |
| Acquisition date | Carries over | Not applicable |
| Gain on a later sale | Measured from the original purchase | Measured from the death |
Take the 1975 apartment. Israel computes betterment tax on five decades of appreciation. The United States computes gain only from the date of death — which, if you sell soon after inheriting, may be close to zero. You then hold a large Israeli tax bill and a small or non-existent US tax bill for the credit to work against.
This is the same shape as the currency trap described on selling Israeli property as a US taxpayer, and it compounds with it rather than replacing it.
The treaty does not fix this
It is natural to assume a tax treaty prevents the two systems colliding. Read the article and it does the opposite of overriding US law — it defers to it.
Article 26(1) of the 1975 US–Israel treaty opens: "In accordance with the provisions and subject to the limitations of the law of the United States", and continues that the credit "shall not exceed the limitations … provided by United States law for the taxable year".
The treaty does two useful things and one unhelpful one. Article 4(4) sources the gain to Israel — income and gains to which Article 7 applies are from sources within a Contracting State "only if the real property … is situated in that Contracting State" — so the Israeli tax is on foreign-source income and is creditable at all. That is the useful part. The unhelpful part is that Article 26 then hands the limitation question straight back to IRC §904, with no re-sourcing rule and no relief from the category limitation.
Under §904(c) an excess credit is carried to "the first preceding taxable year and … any of the first 10 succeeding taxable years". But §904(d)(1) applies subsections (a), (b) and (c) separately to each category of income — general, passive, foreign branch and §951A. The carryover is therefore trapped in one category, and an heir whose only foreign-source income was this single sale may have nothing to absorb it in eleven years.
Which category the gain falls into is fact-dependent — §904(d)(2)(A)(i) defines passive category income by reference to §954(c) — and is a question for your adviser, not for a web page.
The Israeli exemption that looks like a rescue
There is an exemption aimed squarely at inherited homes. Section 49b(5) exempts the sale of an inherited qualifying residential apartment where three conditions hold together:
- The seller is the spouse of the deceased, a descendant, or the spouse of a descendant.
- Before death, the deceased owned one residential apartment only.
- Had the deceased been alive and sold it, they would have been exempt.
Notice what is not tested: your own property holdings. The conditions look through to the deceased. An heir who owns three other apartments can still satisfy all three. For a diaspora family this reads like very good news.
…and the sentence that closes it for most people abroad
The exemption is not self-standing. Section 49a(a) is the gateway to the whole chapter, and it says the seller must be "תושב ישראל או תושב חוץ שאין לו דירת מגורים במדינה שבה הוא תושב" — an Israeli resident, or a foreign resident who has no residential apartment in the country where he is resident.
Then it adds a presumption against you: "יראו תושב חוץ כמי שיש לו דירת מגורים במדינה שבה הוא תושב, כל עוד לא המציא אישור משלטונות המס באותה מדינה כי אין לו דירה כאמור" — a foreign resident is treated as owning a home in their country of residence until they produce a certificate from that country's tax authorities saying they do not.
So there are two separate bars. If you own a house in New Jersey or Lyon, you are outside the exemption entirely — the apartment you inherited in Israel is irrelevant to that. And if you own nothing at all, you still have to prove it with an official document.
This is not a theoretical reading. The Tax Authority's own declaration form for claiming the exemption, form 2988, puts it in the seller-details block: תושב חוץ · "שאין לו דירת מגורים במדינה בה הוא תושב" ❏ · "(מצורף אישור)" ❏. That block governs the whole form, including the section further down for an apartment received by inheritance. The certificate is not carved out of the inheritance route.
Where the exemption does apply, section 49a(a1) caps it at ₪5,008,000 of sale value, with the excess taxed proportionally.
What we do not know, and will not pretend to
Section 49a(a) requires a certificate from the tax authorities of your country of residence stating that you own no dwelling there. We have not been able to establish that any US authority issues such a document. The IRS issues Form 6166, which certifies US tax residency — not the absence of a home.
If no such certificate exists, the condition is one a US-resident heir cannot satisfy however honest their position. That would be a significant conclusion, and we are not asserting it: we could not find a primary source either way. If you have been through this process and know what the Israeli assessor accepted, we would genuinely like to hear from you.
Reporting to the IRS — separate from tax
Two things that are often conflated. Section 2103 limits the US gross estate of a decedent who is a "nonresident not a citizen of the United States" to that part of the estate "situated in the United States". An Israeli apartment is not US-situs, so it is outside US estate tax.
But the bequest is reportable. The IRS requires reporting where gifts or bequests from a nonresident alien or foreign estate "exceeds $100,000 during the taxable year", and requires that each gift over $5,000 be separately identified. That is Form 3520. It carries no tax and significant penalties for missing it.
Frequently asked questions
Do I pay Israeli tax when I inherit the apartment?
No. Section 4 of the Land Taxation Law states that "הורשה איננה מכירה" — an inheritance is not a sale for the purposes of the law. Purchase tax under section 9(a) is charged only on a sale, so no purchase tax arises either. There is no charge to exempt you from; the charge simply never attaches. Tax becomes relevant when you later sell.
What cost basis does the apartment carry when I sell it?
For anyone who died on or after 1 April 1981, section 26(a)(2) sets your acquisition value at what it would have been had the deceased sold the property, and section 37(1)(g) carries the deceased's acquisition date over too. You inherit both the original value and the original date. For deaths before 1 April 1981, section 26(a)(1) uses the value at the date of death instead, or the value fixed for estate-tax purposes where one was determined.
Why does my US accountant say there is almost no gain?
Because the two systems do opposite things. IRC section 1014(a)(1) sets your US basis at the fair market value of the property at the date of the decedent’s death, and section 1014(b)(1) applies that to property acquired by bequest, devise or inheritance. The US therefore sees only appreciation since the death, while Israel taxes appreciation since the original purchase.
Does the US–Israel treaty stop me being taxed twice?
Not here. Article 26(1) opens with "In accordance with the provisions and subject to the limitations of the law of the United States" and adds that the credit "shall not exceed the limitations … provided by United States law for the taxable year". The treaty confirms the credit exists and Article 4(4) sources the gain to Israel, but it defers to section 904 rather than overriding it. There is no re-sourcing rule for this situation.
Can I carry the unused foreign tax credit forward?
Section 904(c) treats excess foreign taxes as paid in the first preceding taxable year and in any of the first 10 succeeding taxable years. But section 904(d)(1) applies subsections (a), (b) and (c) separately to each category of income, so the carryover has to be absorbed by foreign income in the same category. An heir whose only foreign-source income was this one sale may have nothing to absorb it before the window closes.
I inherited the apartment. Is the sale exempt from mas shevach?
Section 49b(5) grants an exemption if three conditions all hold: you are the spouse, a descendant, or the spouse of a descendant of the deceased; the deceased owned only one residential apartment before death; and the deceased would have been exempt had they sold it while alive. Notably the test looks at the deceased, not at how many properties you own. But section 49a(a) gates it separately — see the next question.
I live abroad. Can I use that exemption?
Often not. Section 49a(a) limits the exemption to "an Israeli resident or a foreign resident who has no residential apartment in the country in which he is resident", and adds that a foreign resident is treated as having one until they produce a certificate from the tax authorities of that country stating otherwise. So an heir who owns a home in the United States or France is outside the exemption, and one who owns nothing still has to obtain an official certificate. Israel Tax Authority form 2988 turns this into a tick-box plus an attached certificate, in the seller-details block that governs the whole form — including its inherited-apartment section.
Do I have to report the inheritance to the IRS?
Reporting, not tax. The IRS states that gifts or bequests from a nonresident alien or foreign estate must be reported where they exceed $100,000 during the taxable year, and that each gift over $5,000 must be separately identified. That is Form 3520. Separately, section 2103 limits a nonresident non-citizen decedent’s US gross estate to property "situated in the United States", so an Israeli apartment is outside US estate tax in the first place.
Sources
- Land Taxation Law (Appreciation and Acquisition), 1963 — sections 4, 5(c)(4), 9(a), 26, 37, 49a, 49b (Hebrew)
- Israel Tax Authority form 2988 — declaration for a residential-apartment exemption (Hebrew, PDF)
- IRC §1014 — basis of property acquired from a decedent
- IRC §904 — foreign tax credit limitation, carryover and categories
- IRC §2103 — gross estate of a nonresident non-citizen
- IRS — gifts and bequests from a foreign person (Form 3520)
- United States–Israel Income Tax Treaty (1975) — Articles 4 and 26
Related guides
- Israeli capital gains tax (mas shevach) — how the gain is computed once the basis is fixed
- Selling Israeli property as a US taxpayer — the currency trap, which compounds with this
- Israeli purchase tax — what you would have paid had you bought rather than inherited
- US owners of Israeli property
- Israeli rental income tax for non-residents — if you keep the apartment and let it