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Do heirs in Israel get a stepped-up cost basis when they sell inherited shares?

No. Section 88 of the Income Tax Ordinance [New Version] 5721-1961 excludes a transfer by inheritance from the definition of a sale, so no capital gains tax arises on death, but the heir takes over the deceased's original cost and purchase date. When the heir later sells, the entire gain accumulated since the deceased acquired the shares is taxed. Individuals generally pay 25% on the real gain, or 30% as a substantial shareholder holding 10% or more. Heirs familiar with the US stepped-up basis rule are often surprised by the result.

Israeli capital gains tax treats death as a non-event rather than a fresh start. Because inheritance is not a sale under Part E of the Ordinance, the deceased's purchase price and purchase date carry over to the heir, and the gain on the eventual sale is measured from that original acquisition. The inflationary amount, meaning the part of the gain that only reflects rising prices, remains exempt. Shares the deceased bought before 2003 can be subject to a linear split, which applies different rates to the portion of the gain attributed to the years before that reform. Where purchase records are missing, the Israel Tax Authority may estimate the cost, which can enlarge the taxable gain.

The mismatch hits hardest for Israeli-resident heirs of relatives who died in the United States. The IRS resets the basis to market value at death under Section 1014 of the Internal Revenue Code, while Israel taxes the full historical gain, so a US foreign tax credit may not fully offset the Israeli liability. Non-resident heirs selling Israeli shares may qualify for the exemptions in Sections 97(b2) and 97(b3) of the Ordinance, and new immigrants may be exempt on gains from foreign assets during their 10-year benefit period. A sale of non-traded shares must be reported, with an advance tax payment, within 30 days. Our guide to capital gains tax for non-residents explains the exemptions.

⚖ In Practice
  • Governing law: Section 88 and Part E (Sections 88-101), Income Tax Ordinance [New Version] 5721-1961
  • Competent authority: Israel Tax Authority, through the local assessing office (Pkid Shuma)
  • Rates: 25% of the real capital gain for individuals; 30% for a substantial shareholder (10% or more); surtax may apply where annual income exceeds approximately NIS 721,560 (2026)
  • Timeline: report and advance payment within 30 days of selling non-traded shares; for listed shares sold through an Israeli bank, tax is withheld at source
  • Records: the deceased's purchase confirmations and broker statements establish the cost; without them the Tax Authority may assess a lower figure
  • US contrast: Internal Revenue Code Section 1014 steps the basis up to fair market value at death; Israeli law has no equivalent rule

From the full guide: Capital Gains Tax in Israel for Non-Residents: Rates, Exemptions and Treaty Relief

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