Over the past several years, many Israelis have begun seeking investment opportunities overseas. A significant portion of these investments goes to real estate, particularly in the US. The vast opportunities in the US, the freedom of action and low dollar and interest rates are attractive to many Israelis. The taxation gaps between Israel and the US are solved by the different interstate laws and the tax treaty.
Section 7 of the treaty determines that the primary taxation right belongs to the state in which the real estate is located. This section covers income from rent and income from capital gains on sale.
When an alien citizen files their taxes in the US, there are two types of income to distinguish between:
1
ECI – income from a business or trade, which requires filing and having an ITIN number
2
NEC – passive income, does not necessarily require filing, can be filed if the taxes deducted were higher than the rate determined by the treaty
Concerning income from rent, one can choose between the two tracks. The default option is a 30% rate; should the investor choose to recognize income from rent as income from a business, they can file their taxes, recognize the expenses and pay marginal tax in the US.
Income from tax sales requires filing taxes in the US. There is a difference in taxation of a property held for over a year, and a property held under a year. A property held for under a year owes the regular rates, whereas a property owned for over a year is eligible for qualified tracks. Reporting is done via form NR1040, with the first three pages dedicated to the ECI track, the fourth to the NEC track, and the fifth to personal and informative data. The forms must be filed until June 15th of the following year, with a possible extension until October 15th.
US tax brackets
Tax rate | Income from rent | Tax rate | Income from long-term capital income |
10% | Up to 9,700 $ | 0% | Up to $40,000 |
12% | $9,701 — $39,475 | 15% | $40,000—$441,450 |
22% | $39,476— $84,200 | 20% | Over $441,450 |
24% | $84,201 — $160,725 | 25% | On accumulated property depreciation |
32% | $160,726— $204,100 |
|
|
35% | $204,101 —$510,300 |
|
|
37% | Over $510,300 |
|
|
It is important to remember that the US is a federal nation that provides tax autonomy to its member states. Therefore, many states also tax income and require tax filing. For certain states, filing and payments are also done on a municipal or county level.
