US taxation for Israeli investors
The implications of taxation in the United States are an integral part of the investment process in real estate in general and overseas investments in particular. To understand the tax implications In real estate investing in the US, below is a detailed and up-to-date tax overview for 2014 that expands on the expected tax implications for real estate investors.
To view a brochure that clarifies the issue of taxation of investment profits abroad by the Tax Authority, click here
general
Investing in a U.S. real estate property is expected to generate two types of income: rental income and capital gains when selling the property. This income is taxable in both the United States and Israel. There is a tax treaty between Israel and the United States that regulates the manner of taxation of income generated for residents of one country from sources of income located in another country. For example, Article 7 of the Tax Convention between Israel and the United States states Because when a resident of one country has income from real estate assets that are within the territory of the other country, then the country in whose territory the real estate assets are located has the first right to tax this income. Therefore, in the event that a resident of Israel has income in the United States from real estate assets, the United States reserves the right of the former to impose a tax on this income. The State of Israel is "second in line." For the imposition of the tax. The relief from double taxes will be granted in Israel in accordance with the conditions and rules set forth in the Income Tax Ordinance so that against the tax liability in Israel, a credit will be given for the amount of tax paid in the United States.
US tax payment
There are a number of possibilities for a U.S. tax payment arrangement. One option is to file annual tax returns with U.S. tax authorities and pay the tax in accordance with those reports. Expenses therefore is completely unprofitable economically. In addition, withholding tax will be deducted at the rate of 10% of the proceeds from the sale of the property even if the property is sold at a loss. From a practical point of view, it is worthwhile for a resident of Israel who has purchased a real estate property in the United States for the purpose of investing to submit an annual tax report to the US tax authorities. A report must be submitted to the federal authority and in addition a report must also be submitted to the authorities of the state where the property is located. It should be noted that there are states in the US that do not impose income tax on individuals and therefore a non-resident individual who has property in one of these states files a report to the Federal Authority only.
Taxation of rental income in the US
In the report submitted to the tax authorities, any expense incurred in order to generate rental income can be offset. The guiding principle in the United States is that all ordinary and necessary expenses in the production of income can be offset. Thus, in the case of renting a property, you can of course claim the direct expenses such as property taxes, advertising, cleaning and maintenance, agents' fees management fees to the management company that handles the property, professional attorneys for lawyers and accountants and mortgage interest. In US real estate, depreciation is claimed using the straight-line method according to 27.5 years. Of course, the land component for which there is no depreciation must be neutralized. Indirect expenses such as travel expenses to the US for a visit to the property including flight tickets, hotels, rental car and etc. can be claimed.
After all the specific expenses have been deducted, a non-resident receives a tax benefit in the form of a general annual expense of $ 3,700 called EXEMPTION. This general annual expenditure is also offset against rental income. On the profit remaining after offsetting all of the above expenses a non-resident pays tax at a rated rate to the Federal Authority.
The tax payment is according to a table of individual U.S. residents. Federal tax rates for 2014:
As mentioned earlier, tax must also be reported and paid to the authorities of the state where the property is located.
US capital gains taxation
Capital gain is the difference between the proceeds from the sale of the property (less selling expenses) and the reduced cost of the property.
The reduced cost of the property is the original cost less the accumulated depreciation on the property up to the date of sale. On capital gains the investor pays a graded federal tax provided the property has been held by the investor for more than a year. In some countries there is also a state tax that must be paid.
Recommended investment method in real estate - USA
An investor in a U.S. property will be able to choose between owning the property directly (privately), through an LLC, or an American company.
Benefits of Holding Using LLC
Quick set-up (one or two days) including receiving a number for tax purposes
Legal protection against claims
Flexibility in recognizing expenses related to the operation and holding of the property
Investor personal taxation
When individuals invest in real estate in the United States, it is advisable to make the investment through a wholly owned company that is classified (for tax law purposes in Israel) as a family company. A family company for tax purposes is a "transparent" company (pipeline) and its income is taxed by the individual as if it had been produced by him in the first place. The company's profits are transferred to the shareholder without imposing additional tax. The Israel Tax Authority approves, subject to the existence of the appropriate procedure, the registration of a company that was founded and registered outside Israel as a family company in Israel - an action that may save many taxes on the realization of assets abroad by the company.
The main advantage of a family company (Israeli or foreign) is that no additional tax is imposed in Israel for withdrawing dividends. The benefits of making an investment through a family company - interest and interest income are considered as received by the individual (from limited tax rates - interest 20%; rent from abroad 15%; capital gain 20%) and no additional tax is imposed on income from dividends received Outside Israel, it should be noted that the tax rates that benefit in Israel are conditional on the conditions specified in the Income Tax Ordinance.
Benefits of holding real estate in the US directly
There is no number for immediate tax purposes - only when submitting the annual report the following year.
Without legal protection
The Benefits of Investing as an Individual in US Real Estate They are low costs, and low capital gains taxation that characterizes investment in this way. The disadvantages of investing as an individual are the unlimited liability that exists in the individual, and exposure to inheritance tax in the US on the assets. (You can get advice from us here).
Holding through an ordinary American company
The property can be owned through a regular company. Thus, on the face of it one can enjoy a corporate tax rate only on rental income and thus perhaps take advantage of the American exchange rules (see below). On the other hand, in this way there will be a future tax event when the dividend is distributed.
Obligation to submit a personal report in Israel
The State of Israel is aware that real estate transactions are carried out abroad and when signs of these properties are discovered without proper reporting, the taxpayer is exposed to investigations and criminal proceedings.
The law in Israel stipulates that an individual is not exempt from submitting a personal report when he, his spouse or child who has not yet turned 18, at any time in the tax year had a right (share) in a foreign resident company or other foreign assets as specified in the regulations.
Taxation of income from renting and selling apartments in the United States
Until the end of 2002, rental income received abroad was not taxable in Israel. From the 2003 tax year, this income is taxable in Israel, and a special provision was established (in section 122A of the Ordinance) that compares taxable income abroad to taxable nominal income in the capital market at only 15%.
Regarding rental income, two taxation routes have been established in Israel:
15% tax on rent from abroad:
The law in Israel stipulates an alternative of paying tax at a rate of 15% on rental income from abroad. Only individuals (and family companies for tax purposes whose income is attributed to an individual) are entitled to a tax rate of 15%. Any other expense. The landlord is not entitled to any exemption in respect of the income nor is he entitled to set off losses. Therefore, it is recommended that the tenants of the apartments, both in Israel and abroad, stipulate in the rental agreement that all expenses for the apartment will be paid directly by the tenants. This alternative does not allow for any credit for tax paid abroad. The tax relief applies to rental income for all types of real estate as long as the income does not go to a business (such as: operating a parking lot, hotel, etc.). This route will usually suit those in Israel High marginal tax and purchased a property in the US that has no significant expenses in operating the property.
The usual route:
Income from renting abroad is normally dissolved as income from a commercial real estate property in Israel. Expenses related to the property and its operation will be deducted from the rental income. The taxpayer will pay tax on the profit remaining after offsetting the expenses according to his marginal tax rate in the country. In addition, the amount of income above 25% of the average wage in the economy (currently about NIS 26,700) will also be paid Social Security at a rate of 12%. The profit for tax purposes will be calculated according to the existing rules in Israel. In addition, all activity data must be translated from dollars to shekels in accordance with the translation rules set forth in the tax regulations in Israel. Therefore, it is not inconceivable that the taxable income in Israel will be different from that reported in the United States. In this route, the taxpayer receives a credit in the amount of the federal and state tax he paid in the United States - against his tax liability in Israel.
The test in choosing one of the tracks above, is purely mathematical, and each investor will choose the track that will lead them to a minimum tax payable.
Taxation of capital gains in Israel
For assets purchased after 1.1.2003 the rate of capital gains tax in Israel is 30% -20% and of course here too the assessee will be given Credit in the amount of the federal capital gains tax, and the state tax paid in the United States.
Offsetting losses
The Israeli legislature has established rules to offset losses in the United States. The purpose of the above rules is to prevent imports of losses from sources in the United States over which the supervision and control of the tax authorities in Israel is restricted. From passive sources, and will be given Offsetting against passive income abroad. For example, a loss from rent in the United States can be offset against interest income in the United States.
(It is worth noting that when it comes to the activity of a business in the US, then unlike a home property - it will be possible to offset the current losses from rent in full against capital gain).
Where it is not possible to offset all the loss from rent in the tax year, the amount of the loss that will not be offset will be transferred to subsequent years. In addition, according to section 92 of the Income Tax Ordinance, capital losses originating abroad may be offset first against capital gains abroad and then also against capital gains or real estate appreciation generated in Israel.
To exchange assets under U.S. law
When an investor has a property that has improved and risen in value and he is interested in selling it, yet he wants to continue investing in real estate in the US. Section 1031 of the U.S. Income Tax Act allows an investor to defer capital gains tax payment if the investor purchases a new asset at a cost equal to or higher than the consideration he received for the asset sold.
In such a case the payment of capital gains tax will be deferred until the date of sale of the newly acquired property. Even at this point it will be possible to make another pass and in this way continue indefinitely. Property exchange also exists under Israeli law in accordance with section 96 of the Income Tax Ordinance. However, section 96 was originally intended to allow the exchange of equipment in factories and the application of section 96 regarding real estate abroad is problematic. In any case this procedure of property exchange is Technical procedure with requirements and conditions Very certain and it is recommended not to try to perform it without professional advice and guidance. It should also be noted that the tax deferral in the United States is not exempt from the payment of Israeli tax.
U.S. Inheritance Tax
Exists in the U.S. for both U.S. citizens and nonresident investors. This tax should be taken into consideration and prepared accordingly. In fact, the U.S. estate tax may apply to any Israeli citizen even if he or she is not a U.S. citizen or resident, provided it holds U.S. assets worth more than $ 60,000. This refers to assets such as real estate in the United States, mutual funds and securities of American companies. Exposure to U.S. estate tax can be prevented through tax planning.
Warning against reliance
The purpose of this review is to bring to your attention fiscal information regarding real estate taxation in the United States. The memorandum is edited in a general and simplistic manner and is not necessarily accurate and up-to-date. The above is not professional advice and should not be relied upon without consulting a professional.
