Taxation of Property Investments in the United States

In recent years, the popularity among Israeli investors regarding the purchase of residential real estate in the US has grown. In the past, the field was mainly dominated by real estate companies with branches in the US, and today, as a result of the deep real estate crisis in the US and the low dollar exchange rate, many private investors can be seen in the game operating through companies whose main business is locating and managing the property for the private investor (for the sake of full disclosure, it should be noted that the Afik Turgeman law firm has been accompanying such projects of SB Capital for several years, both projects for purchasing homes by investors and large sum investments in a corporation that purchases a large number of homes and jointly manages them).
First, it is important to ensure that the purchase is made from a reputable and experienced company in the field, since there are also charlatans in the market (as in any market). It is also important to make sure that the issue of renting out the property and its future maintenance are handled properly, so that the investor will not have to handle the matter themselves. Beyond that, it is important to emphasize the issue of taxation.
When a private investor wishes to purchase a single property, or a few properties, they will likely choose to do so in one of two ways: registering the property in their name or purchasing it by opening an LLC-type corporation. An LLC has several advantages, including the limitation of legal liability, the possibility of deducting a wider variety of expenses against the profits from the property, and still enjoying the investor's personal taxation, since for tax purposes the corporation can be disregarded in an LLC-type corporation. Holding the property personally does not allow obtaining a tax identification number immediately but only upon filing the report and limits the variety of expenses that can be recognized. Nevertheless, in certain cases it is right to invest personally and this requires an examination by an expert in the field.
It should be emphasized that even with an LLC, the investor is required to open a tax file in the United States upon filing the annual report and to report income in the United States and Israel on an ongoing basis. The tax treaty between Israel and the US regulates this issue and allows recognition in Israel of tax paid in the United States to prevent double taxation.
When the investor comes to sell the property, a capital gain or loss is created. In Israel and the US, the capital gains tax rate is 20%. In the United States, state tax may also apply and a sale in the year of purchase may be considered as ordinary income.
Ordinary income (e.g., rent) can be offset by direct expenses arising from the operation and maintenance of the property (e.g., insurance, management, etc.) and in some cases also indirect expenses such as a flight to visit the property and related expenses. In the United States, it will also be possible to recognize depreciation on a property and the tax rate ranges from 10% to 39%, to which, in certain states, state tax is added and it is important to verify its rate before choosing a property for investment.
In Israel, there are two tax tracks for ordinary income, at the investor's choice. One can choose a marginal tax track that takes into account the direct expenses on the property or a fixed tax track of 15% in which indirect expenses or a credit against the tax paid in the United States will not be allowed. In any case, the taxation that will ultimately apply to the Israeli investor will be in accordance with the country whose taxes are higher, with consideration for the prevention of double taxation. The choice between the tracks requires proper planning and consultation with an accountant specializing in the field.
In conclusion, before investing it is important not only to ensure that one invests through a reliable company and that there will be someone to handle the renting out of the property and its maintenance, but it is also important to carefully examine the tax implications of the investment and the choice of the correct tax track.