The Israel Tax Authority recently published Position Paper No. 03/2026, addressing a question of practical importance to heirs: whether the capital gains tax exemption applicable to the sale of an inherited residential apartment may be claimed where an agreement has been entered into with respect to the apartment as part of an urban renewal transaction.

Until the publication of the Position Paper, there was no clear guidance as to whether the exemption applied in cases where the original apartment had been demolished as part of an urban renewal project, leaving only a right to receive a replacement apartment in the future.

Capital Gains Tax Exemption for an Inherited Residential Apartment

Section 49B(5) of the Real Estate Taxation Law allows an heir to sell a residential apartment received by inheritance with an exemption from capital gains tax, subject to three cumulative conditions:

• The heir is a spouse, a descendant of the testator, or the spouse of a descendant.
• The deceased owned only one residential apartment at the time of death.
• Had the deceased sold the apartment, he or she would have been entitled to a tax exemption.

What Changed Following Amendment 96??

Amendment 96 to the Real Estate Taxation Law established that, even during the period in which the building has been demolished and the new apartment has not yet been constructed, the right to receive the replacement apartment shall, subject to the conditions prescribed by law, be deemed a “residential apartment” for capital gains tax and purchase tax purposes. The purpose of the amendment was to remove tax barriers in urban renewal projects and to allow the regular tax exemptions to apply during the interim period.

Key Points of the Israel Tax Authority’s Position

The Position Paper distinguishes between two scenarios:

Inheritance Prior to the “Date of Sale” in an Urban Renewal Transaction

In the event that the deceased passed away before the tax date of the urban renewal transaction, the heir steps into the deceased’s shoes. If the statutory conditions are met, the heir may benefit from the exemption under Section 49B(5), including upon the sale of the replacement apartment or the right to receive it.

Inheritance After the “Date of Sale"

כאשר הפטירה מתרחשת לאחר עסקת ההתחדשות, היורש יורש את הזכות לקבל את הדירה החדשה. אם הירושה התרחשה לאחר יום התחולה של תיקון 96 ולפני השלמת הבנייה, ניתן יהיה ליהנות מהפטור גם אם הדירה החדשה טרם נבנתה. לעומת זאת, אם הירושה התרחשה לפני יום התחולה של תיקון 96, הפטור לא יחול, אף אם מכירת הדירה תתבצע לאחר השלמת הבנייה.

כאשר הירושה מתרחשת לאחר השלמת בניית הדירה החלופית, הזכאות לפטור תיבחן בהתאם לתנאים הקבועים בסעיף 49ב(5) לחוק.

Applicability of the Position Paper

The Israel Tax Authority emphasizes that the Position Paper applies exclusively to urban renewal transactions (evacuation and reconstruction projects and TAMA 38 projects) in which one residential apartment is received under a full tax exemption, and that no conclusions should be drawn from it with respect to other real estate transactions.

Conclusion

For the first time, the Position Paper provides an official position of the Israel Tax Authority on this issue, offering greater certainty to heirs and rights holders in evacuation and reconstruction projects.

It clarifies that, in many cases, the capital gains tax exemption may be preserved even where the original apartment has been demolished and the heir holds a right to receive a replacement apartment. However, eligibility for the exemption depends, among other things, on the date of death, the stage of the urban renewal project, and the satisfaction of all the conditions set forth in Section 49B(5) of the Law.

In light of the complexity of the issue and the practical implications of the Position Paper for transactions involving the sale of inherited apartments in urban renewal projects, it is advisable to consider its applicability as early as the transaction planning stage and to assess each case individually, based on its particular circumstances.

Note: This overview provides concise information for informational purposes only. It does not constitute legal advice and should not be relied upon as such.

To read the Tax Authority's full position paper, ,click here.