Tax on Real Estate Abroad
Income from renting real estate abroad is subject to income tax in Israel and in some cases also Social Security tax. The sale of real estate abroad is subject to capital gains tax in accordance with the Income Tax Ordinance (compared with the appreciation tax applicable to an apartment in Israel). Our office checks the remaining tax balance to be paid in Israel, if any, in agreement with the double taxation treaty between Israel and the country where the apartment is sold in and according to domestic laws in Israel and guides the manner of reporting and paying tax, even in case there is no tax treaty. It is recommended to consult with our office even before purchasing property in order to become aware of all the tax deliberations that will affect the viability of the transaction.
Planning the right way to Purchase a Property Abroad
Our firm examines the right solution for each client when purchasing property abroad, hoping to reduce the tax burden. Even when it is proposed to purchase property abroad through a company – there are considerations regarding the location of the company, control, management, etc. Our firm will conduct inspections for the client already at this stage of all the tax considerations that are to be anticipated in the future, including purchase tax in the country where the apartment is located, tax on rent both abroad and in Israel, and capital gains tax both abroad and in Israel.
Advice on Taxation of Income from Real Estate Rentals Abroad
How is income tax determined on real estate income abroad?
There are three main routes to taxation:
Track 15% | Tax On Real Estate Leased Abroad
Tax at a fixed rate of 15% – without deduction of expenses (excluding depreciation expenses) and without credit of foreign tax paid abroad. We will consider the suitability of this route mainly in the following cases:
- In a situation of a property abroad, where there are no significant expenses for the property
- In a situation when the apartment is purchased rather than inherited
- In a situation when there is no foreign taxation in the destination country or the taxation in the foreign country is very low
- In a situation where the property is financed mostly from equity and there are no financing expenses
In a situation where the property owner has high incomes from other sources
Marginal Tax Route:
The marginal tax level is applicable after deducting all expenses attributed to the property, including depreciation and financing, and after deducting the tax paid to the state in which the apartment is located.
It should be known that there will be situations where the tax authority will claim that the real estate activity abroad amounts to a business in accordance with the tests set out in the ruling and will require that the activity be taxed using the fruitful marginal tax rate.
We will consider the suitability of this route mainly in the following cases:
- In a situation where the property owner has a very low income
- In a situation when the property owner is over the age of 60 (depends on the level of income from other sources)
- In a situation where the owner has already exceeded the maximum for paying or doesn’t pay Social Security Tax, because our opinion has determined that it is not a business or for another reason
- In a situation where the withholding tax on profits in the foreign country is relatively high
- In a situation where the property is mostly financed through interest- bearing loans
- In a situation where the indivudal has losses that can be offset (in a case where it pays off to use these losses)
- In a situation where there is an exemption for the disabled in accordance with section 9(5)(a) of the Income Tax Ordinance
Possession Through a Foreign Company Route:
In this route, we will contact a foreign company in the foreign country where the property is located. This firm will purchase the real estate and manage it, thus, the income in the country will be dividend income following all the deductions within the company.
We will consider the suitability of this route mainly in the following cases:
- In a situation that there is a significant exposure to the claim that the income is business
- In a situation where the property owner has profits in foreign companies (controlled and managed from abroad) and these profits did not increase as a dividend
- In a situation where there is an inheritance tax exposure (with certain restrictions since choosing this route doesn’t fully solve the problem!)
- In a situation where there are many expenses in the destination country and the manner of recognition of them differs substantially compared to the expenses that can be deducted in accordance with Israeli law
- In a situation when there are additional businesses in the destination country
- In a situation when the property owner has losses from other apartments or other businesses abroad
Social Security Tax for Renting Abroad:
In the marginal tax track in general there is an obligation to pay Social Security at certain ages, but at limited rates. For an annual income in excess of NIS 31,656 and up to an annual income of NIS 528,240 (as of 2020), the owner will pay Social Security at a progressive rate of 9.61% to 12%.
Despite this obligation, in cases where we determine through careful deliberation that earnings are not classified as business income, it is possible to exempt this income from Social Security Tax.
- There are additional conditions related to the deduction of depreciation and differences arising from the method of calculating depreciation in Israel compared to the country in which the asset is located. Sometimes the calculation is completely different and it is important to pay attention and understand this.
- The tax rates in the marginal tax route are starting at 31% because this form of income is considered passive. When the income is considered active the tax bracket will start from 10%, this can happen in some cases.
- In a situation when there is a number of apartments- there is exposure to the Tax Authority’s claim regarding business income. This issue should be taken into account in the consideration that outline the conduct of business abroad.
- When the customer is a new immigrant, returning resident, or veteran returning resident- there will be additional considerations.
- As part of the considerations for establishing a foreign company abroad, one should check all the related expenses- such as, submitting financial statements in the destination country (if necessary, in accordance with domestic law), etc.
Some of the considerations in choosing the appropriate tax on real estate leased abroad will be different than tax considerations, for example:
- Legal liability considerations: sometimes, certain assets place increased legal risk on their owners. These risks include a dilapidated property, a risk arising from legal liability under foreign domestic law, and even delusional issues such as criminal liability imposed on the property owner in the event that the vegetation is not pruned in accordance with municipal bylaws!
- Inheritance Tax Consideration: Inheritance tax for the non-citizen imposes a liability on any inheritance valued at more than $60,000. Inheritance tax is at a rate of 40% (!) Holding through a company does not always help resolve the issue. At times we need to use an Israeli company or with special insurance in order to avoid liability for inheritance tax.
- Using a transparent company (family company or home company) in Israel does not always prevent inheritance tax in the US. IRS members know how to read Hebrew and understand the meaning of a transparent company. Tax planning to help solve this problem is a little more complex.
Our firm examines the most appropriate route for each client and regulates the reporting and payment of tax in Israel and abroad. Advice on the decision to choose a route for taxing rental income abroad usually includes a one-to- two-hour consultation with an attorney or accountant from our firm. In this meeting, the right path will be chosen according to the individuals’ circumstances and instructions will be given to the property owner or the treating accountant regarding reporting in Israel and abroad.
In addition, we can also assist in case there is a need to report to foreign tax authorities. Our firm has many contacts with accountants abroad. We have contacts in over seventy countries.
What Should You Bring to the Counseling Session?
- Documents relating to the purchase of the property (in the source language) in which the original purchase amount can be seen.
- Documents relating to tax payment in the country of origin of the property in the last two years.
- Reports submitted to foreign tax authorities and including income from the property.
- Annual reports submitted to the Israeli Tax Authority by the property owner in the last two years.
- Data relating to direct and indirect expenses in respect of the property.
- Loan documents and liens relating to the property if any.