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WHAT DOES A US PURCHASER OF ISRAELI REAL ESTATE HAVE TO KNOW ABOUT US TAX LAWS? 

AUTHOR:

Mark H. Hess, President , Mark Hess Tax Consultancy Corp. 

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The war against Hamas and the proliferation of antisemitic incidents in the US have gotten many Jews in the US more interested in making Aliyah and in buying real estate in Israel. Reports from the Israeli Ministry of Population and Immigration indicate that over 1 million people have initiated the process of immigration to Israel. 

Here are a few facts that you should know about how the US views your ownership of Israeli real estate from a federal income and estate tax perspective: 

  1. The US, unlike virtually all other countries, taxes its citizens on their worldwide income. This means that regardless of where you live, if you are a US citizen you will always have to pay tax in the US on the income that you have earned either within or outside the US. Israelis, on the other hand, are only taxed on their worldwide income if they are Israeli residents; if an Israeli resides outside of Israel, he or she is taxed only on income sourced in Israel. There is a tax treaty between Israel and the US that attempts to avoid double taxation if you are an Israeli resident and a US citizen, but there are instances in which the treaty may not help you avoid double taxation. 
  1. If you sell Israeli property as a US citizen, you are subject to capital gains tax both in Israel and in the US, regardless of where you are resident. That is because the income on the sale of the property is considered Israeli sourced income. Application of the tax treaty should result in your paying the higher of the US or the Israeli capital gains tax on the transaction. 
  1. A married couple filing jointly can deduct mortgage interest and mortgage points up to $750,000 on Israeli real restate that they use as a home. Israeli real estate taxes cannot be deducted on their US tax return.  
  1. If you treat the Israeli property as a rental, you can deduct on your US tax return the ordinary and necessary expenses for managing, conserving and maintaining the property – examples of these expenses are mortgage interest, property and liability insurance, repair and maintenance costs, depreciation, and travel expenses related to maintaining the property. You cannot deduct the cost of improvements, although you can depreciate the cost of improvements over time and can deduct the value of the depreciation on your US return. 
  1. If you exchange one piece of Israeli rental real estate for another, you can avoid tax in the US if the transaction is structured as a like-kind exchange under section 1031 of the Internal Revenue Code. These rules do not apply if one of the properties is in the US and the other is in Israel. 
  1. Israeli real estate is part of your taxable US estate when you die. If your spouse is a US citizen and on death you leave the Israeli real estate to your spouse, there is no estate tax. However, if your spouse is not a US citizen, there would be an estate tax if the value of the assets, including the Israeli property, that you leave to your spouse exceeds $12.92 million. In some circumstances, it will make sense to set up a qualified domestic trust (“QDOT”) if your spouse is not a US citizen and you have a large estate. 

Mark H. Hess, President , Mark Hess Tax Consultancy Corp. 

US 310.926.7499  IL +972.547.684176 

Email mark@hesstaxlaw.com

Web www.hesstaxlaw.com