Many of us strive to increase our financial capital. The Israeli market offers investment opportunities, but often the returns are not high enough to meet expectations.
Smart investors are looking for new investment paths, and one of them is investing in real estate in the US, by:
• Purchase of directly owned property/properties.
• Investing in a yielding property with several apartments – an investor who joins a group of investors, together they purchase a yielding property and manage it jointly.
Investing in real estate in the United States can be very profitable and before setting out and making the investment, it is important to get to know the American taxation system well, in order to prepare accordingly.
This article was written in collaboration with Marcovich Cohen CPA office, accountants with a rich professional background in the field of American taxation, who provide consulting and taxation services to both individuals and businesses, and are intimately familiar with the investment market in the USA.
Here are some of the important points they emphasize for those planning an investment in the US.
The initial tax right to the US
The initial tax right belongs to the United States, according to Article 7 included in the tax treaty signed between Israel and the United States. This means that if, for example, an Israeli investor purchases an investment property in the United States, he is taxed first of all in the United States. It is important to emphasize that this is an investment by an Israeli citizen who does not live in the US, in US property.
Reporting to the US on investments and tax types
Any investment in real estate in the US is required to be reported to both the US and Israel. For investors, direct income related to the purchase and operation of the property must be reported, but also indirect investments, in relation to the management of the property from a distance (such as: expenses for flights, interest on loan, expenses for a CPA and attorney, etc.).
The reports will include:
• Reporting of current income received from real estate rental.
• Reporting for income from the sale of the property – short-term which is a time reduced by a year, compared to a time longer than a year (these are two different types of reports depending on the time of the sale).
Route selection
An investor, a resident of Israel as mentioned above, will be able to choose between two tax routes:
• Marginal tax track (net income from abroad) – in this track, the income from renting abroad is taxed normally and all expenses related to the operation and holding of the property will be recognized as an expense and the remaining profit will be paid by the investor according to the level of the marginal tax in which he is, where the minimum tax rate is 31%.
It should be noted that regarding the recognition of expenses, they will be recognized according to the rules used in Israel and therefore, a situation may arise in which the taxable income in Israel will be different from that reported in the USA. In addition, the investor choosing this route will receive a credit for the amount of the federal tax as well as the state tax that was paid in the USA “B – against the balance of his tax debt in Israel.
• 15% tax route (gross income minus depreciation) – in this route, a fixed tax of 15% of the gross income, minus depreciation only, will be paid.
In addition, in this route there will not be an option to offset expenses nor to credit the tax paid in the US (this is double taxation).
How do you know which route is better to choose? The answer is mathematical and each investor will choose a route that will lead him to the minimum tax to be paid.
Tax rates for properties in the US – calculation for individuals
The tax rates (federal tax) range from 10%, the lowest level, to .37%
You can find in our guide on the website a table detailing the rate of tax rates, according to the tax brackets in the USA (updated according to calculation for 2022).
Cancellation of tax exemption
The exemption that was customary for tax for individuals was canceled already in 2018, so today tax must be paid from the very beginning, starting with the first dollar that comes in to the investor for profit purposes.
Reporting to other US authorities
There may be a possibility of charging tax reporting for additional authorities in the US such as the tax authority in that country STATE TAX or even the local municipal authority MUNICIPAL TAX.
Read more about taxation in the United States on Marcovich’s Cohen website – CPA office.
