Inheriting a House in the US While Living in Israel: Probate, the Step-Up, and the Basis Israel Remembers

This is orientation, not legal or tax advice. It maps what exists and the questions to take to a licensed professional. It does not tell you what to do about your own estate or taxes.

Every other inherited asset in this series can, eventually, be moved: the brokerage account transfers, the IRA distributes, the bank balance wires. A house in New Jersey does not. It stays exactly where it is, under the law of the state where it sits, and everything about it, the probate, the title, the sale, the first layer of tax, happens in a country you no longer live in, on a schedule set by a state court you may never visit. Meanwhile the country you do live in has its own opinion about the sale, and its opinion starts from a different purchase price. This page orients you on the sequence: getting title through ancillary probate, the American step-up in basis that happens by itself, the Israeli continuity principle that does not, and the order of operations that keeps the two systems from colliding. It is general information, not legal or tax advice; a house sale across two tax systems is exactly the situation where the specifics decide everything, and a cross-border professional should see yours.

The house answers to the state it sits in

Real property is the one asset class where "where" beats "who." It does not matter that the heir lives in Ra'anana or that the will was probated in the decedent's home state. If the house is in a different state than the one that handled the main probate, that state generally requires its own secondary proceeding, called ancillary probate, before title can pass. If the main probate and the house are in the same state, one proceeding covers both, but that proceeding still runs on that state's timeline, with a court-appointed executor or personal representative doing the work locally.

For an heir in Israel, the practical meaning is that someone on the ground handles this: the executor, a sibling who stayed, or a probate attorney in the county where the house sits. Powers of attorney, notarized signatures through the US Embassy's notary services or an apostilled Israeli notarization, and a lot of patience substitute for presence. Houses held in a revocable living trust or passed by a transfer-on-death deed (available in some states) skip probate entirely, which is precisely why those tools exist, but if the house was owned outright in the decedent's name, the court process is the gate everything else waits behind.

None of this is the tax system yet. It is the reason the tax questions arrive months later than heirs expect.

The American side: the step-up that happens by itself

US tax law gives inherited property a reset that heirs of long-held houses come to appreciate. Under IRC section 1014, the heir's cost basis in the house is generally its fair market value on the date of death, not what the decedent paid for it. The IRS states this plainly in its Gifts and Inheritances FAQ, and Publication 551 carries the details. A house bought in 1994 for $120,000 and worth $520,000 at death gets a new $520,000 basis. Sell it for $540,000 and the taxable gain is $20,000, not $420,000. Decades of appreciation leave the picture, automatically, by operation of law.

Two details make the automatic part work in practice. First, the step-up is only as good as the evidence behind it, and the evidence is a date-of-death appraisal. Order one early, from a licensed appraiser in the house's market, even if the sale is a year away. It sets the US basis, it prices the estate, and, as the next section explains, the same document does double duty on the Israeli side. Second, inherited property is treated as held long-term regardless of how quickly the heir sells, so whatever gain exists gets long-term capital gains treatment rather than ordinary rates.

The state where the house sits may also want income tax on the sale gain, and several states require withholding at closing when the seller lives out of state, reconciled later on a nonresident state return. And one branch point matters for mixed families: if the heir is not a US person at all, an Israeli sibling with no US citizenship inheriting alongside you, the sale of US real estate by a foreign person triggers FIRPTA withholding under IRC section 1445, generally 15 percent of the gross sale price held back at closing and reclaimed, in whole or part, by filing a US return. A US citizen living in Israel is still a US person; FIRPTA is not their problem. Their non-citizen co-heir has to plan for it.

If the decedent was not a US person but owned the American house, a different and harsher regime appears before any of this, the $60,000 estate-tax exposure we cover in the $60,000 trap. This page assumes the more common case in this audience: an American parent, an American house, an heir in Israel.

The Israeli side: the basis Israel remembers

Israel has no inheritance or estate tax, a point every law-firm FAQ on the internet repeats, and it is true: receiving the house is not a taxable event in Israel, and merely taking title triggers no Israeli filing. The Israeli question waits for the sale, and it starts from a rule that surprises people who just absorbed the American step-up.

Israel's Income Tax Ordinance applies a continuity principle, anchored in section 88: an heir steps into the decedent's tax shoes. The starting price for the Israeli capital-gains calculation is what the decedent originally paid, on the date they paid it, not the value at death. The same 1994 house that America now treats as a $520,000-basis asset is, to Israel, still a $120,000-basis asset. An Israeli-resident heir selling it faces Israeli capital gains tax, generally 25 percent on the real (inflation-adjusted) gain, measured from 1994. The two systems are not disagreeing about the tax rate; they are disagreeing about when the story starts.

Three things soften this, and they are the three things to know before the sale, not after.

First, the oleh window. New immigrants and senior returning residents are exempt from Israeli tax on foreign-source income and capital gains for ten years from arrival. A sale of an American house inside that window is generally outside Israeli tax entirely. The 2026 change under Amendment 272 affected the reporting exemption, not the tax exemption: residents arriving from January 1, 2026 report foreign holdings even while the tax exemption holds. If you are inside your ten years, the window, not the basis, is the headline, and pinning down your exact arrival date and status is step zero.

Second, the green track. For assets inherited from a foreign resident, the Israel Tax Authority operates an application procedure, Form 905 on the so-called green track, that can reset the Israeli basis to the value at the date of death, a step-up on request. This is the piece heirs miss: the American step-up is automatic; the Israeli one is applied for. It exists precisely for this situation, an Israeli resident inheriting from an American parent, and the date-of-death appraisal you ordered for US purposes is the supporting evidence. Without the application, continuity applies, and in the worst documentation cases, where the original cost cannot be established at all, heirs have faced tax computed against a basis of effectively zero.

Third, the treaty backstop. Where both countries do tax the sale, the US, as the country where the real estate sits, taxes first, and Israel generally credits the US tax against the Israeli liability on the same gain. Because the US gain after the step-up is often small while the uncorrected Israeli gain is large, the credit does not automatically make the problem disappear, which is exactly why the green track and the oleh window matter more than the treaty for this asset.

The order of operations

Sequenced, the whole thing looks like this. Title first: ancillary probate or the trust shortcut, in the state where the house sits, because nothing sells before the title moves. Appraisal second, dated to the date of death, because one document anchors the US basis, supports the Israeli green-track application, and prices the estate. Decision third: keep, rent, or sell. Renting means income tax in both systems every year, US and state returns as a nonresident landlord plus Israeli tax as a resident receiving foreign rental income, an annual obligation that many heirs underestimate against the one-time event of a sale. Selling near the appraised value keeps the American gain small by construction.

Then the sale itself, with FIRPTA withholding only in the non-US-person branch and state withholding checked either way. And finally the wire. The proceeds landing in an Israeli bank account convert a US-real-estate problem into a foreign-account one: the balance now counts toward the FBAR and Form 8938 thresholds on the US side, the annual cycle we walk through in FBAR and Form 8938 for an inherited Israeli account. The house is gone; the reporting is just beginning.

If the estate also included financial assets, the mechanics are different in kind, not just degree: an inherited US brokerage account moves through transfer paperwork rather than probate courts in many cases, and an inherited IRA or 401(k) runs on distribution rules with their own clock. The house is the slow asset; do not let its timeline stall the others.

Common questions

Do I pay Israeli tax when I inherit the house? No. Inheriting is not a taxable event in Israel and there is no Israeli inheritance tax. The Israeli questions begin if and when you sell, or when the house produces rental income.

What is the two-year rule people mention? It refers to the US home-sale exclusion, which requires having owned and lived in the house as your main home for two of the five years before sale. An heir in Israel who never occupies the American house does not qualify, but the step-up usually does the same work: if you sell near date-of-death value, there is little gain to exclude.

What is the six-month rule? US estates that actually owe estate tax can elect an alternate valuation date six months after death, which then sets the basis. The election exists only where it reduces both the estate's value and its estate tax; for the large majority of estates, which owe no estate tax, the date-of-death value is the basis and there is no election to make.

Can I avoid the American capital gains tax? For post-death appreciation, not really, but the step-up already removed the pre-death appreciation, which is where the real money was. The bigger planning question for an heir in Israel is usually the Israeli side: the green track and the oleh window.