An inheritance tax is imposed on the net properties of a deceased person. A foreign citizen investing in the US must understand the significance of such exposure. Inheritance tax is applicable to any asset in the US, including shares and intangible assets. This means that even investments in the stock market with exposure to the US may incur an inheritance tax. During the Trump administration, a significant change took place, doubling the reporting threshold for US citizens. This reform did not affect the effect of this tax on foreign citizens. Foreign citizens are exempt from reporting and paying on $13,000, equal to properties valued at $60,000, beyond which are subject to tax brackets.
In order to reduce exposure to this tax, there are several solutions that require careful judgment and examination of cost/profit. Of course, the variety of circumstances and terms will eventually decide which solution is best, and for that reason I is best to consult a professional.
Inheritance tax brackets
Tax rate | Owed over the amount of – | Owed under the amount – |
18% | 0 | 10,000 |
20% | 10,000 | 20,000 |
22% | 20,000 | 40,000 |
24% | 40,000 | 60,000 |
26% | 60,000 | 80,000 |
28% | 80,000 | 100,000 |
30% | 100,000 | 150,000 |
32% | 150,000 | 250,000 |
34% | 250,000 | 500,000 |
37% | 500,000 | 750,000 |
39% | 750,000 | 1,000,000 |
40% | 1,000,000 | ∞ |
REIT taxation
An REIT (real estate investment trust) is a company that holds, manages or funds real estate and incomes generated by it – just like a trust fund, with emphasis on real estate. In order to be considered a REIT, 75% of the company’s properties must be invested in real estate, cash or bonds, 75% of its income must come from rent, interest on real estate financing or real estate sales, and it is obligated to divide 90% of taxable income to its shareholders. The trust is often disregarded and exempt from company tax, so the investor/shareholder is the one who bears the burden of tax.
An REIT enables investors lacking the necessary capital to diversify their portfolio and be indirectly exposed to real estate, in order to directly invest in real estate.
There are 4 kinds of REIT income:
- Distribution of gains – ordinary dividends
- Capital gain distribution
- Return of capital
- Capital gain on share sale
The category is determined according to several factors:
- Whether the REIT is traded or not;
- The investor holds less than 1% of the company shares;
- The investor is an alien.
In such cases, both ordinary dividends and capital gain distribution will be viewed as dividends and taxed according to the Israel-US tax treaty’s section on dividends. The tax rate charged by the US will be 25%. No additional taxation in Israel is required. Return of capital and capital gain on share sale will be exempt from tax in the US but owed in Israel, but this also requires that at least 50% of the share capital be held by US entities.
If the REIT has not been traded and/or the investor holds over 10% and/or less than 50% of the investors are American, capital gains distribution will require a 21% tax and capital gains from selling and return on investments will not be exempt. This may also require filing US tax reports.
