When you are considering investing in profit-yielding real – estate in the United States, it is important to consider the tax requirements resulting from the investment, owed to the IRS in the United States.
The United States collects taxes on profits generated within its borders, much like every modern country in the world. Sufficed to say that the American tax authorities tend to perform tax audits on foreign investors as well and tax those who do not report their earnings and pay taxes as they are required to do.
That is why it is important to be familiar with the laws that have to do with real – estate taxation and the tax requirements resulting from them. In the following article, we will explain everything about the transfer tax brackets in the United States and the ways its absence benefits the Israeli investor, in addition to taxes that are collected in practice for real estate investments in the United States.
The Relevance of the tax brackets in the United States for Israeli investors
The substantial rise of real estate prices in Israel has led to a noticeable difficulty in the investor’s ability to create profit from yielding real estate deals in Israel in the past few years. This is in spite of the rise in rent prices.
If in the not–so–distant past, Israeli investors had the option of receiving a yearly return of about 8 percent of the price of the property, today it is close to impossible to find options for purchasing profit-yielding real estate with yearly return potential of over 3 percent.
As a result of this many real estate investors from Israel now turn to purchasing profit-yielding real – estate in the United States. This option results not only in an overflowing return from that one that can be earned from real estate investment deals in Israel but also in other prominent pluses in the taxation field, that could possibly save Israeli investors a very substantial amount of money.
A great example of such a savings opportunity is clear in the subject of transfer tax, which in buying American real – estate, is in fact, not a factor at all.
Transfer tax – main characteristics
In the real estate tax law in Israel, it is stated that purchasing rights in real – estate properties, including a residential apartment, a private house, a lot, or different kinds of commercial building – requires the buyer to pay a transfer tax that comes out to a certain percent of the properties worth.
In certain cases, the tax is by graded brackets, collected in addition to the price of the property itself. Transfer tax is, in fact, a certain percentage of the expenses of the purchasing deal, while the amount is calculated by the type of property and its worth. The transfer tax brackets in Israel are updated yearly by the ministry of finance according to an index.
The difference between transfer tax brackets in Israel and the United States
The most fundamental difference that exists between property taxes that are collected in Israel to those that are paid in the United States is, in fact, that in the United States there is no collection of transfer tax with the purchase of real – estate. The customary practice in the United States is to pay taxes on profits.
In accordance with that, there is taxation in place on the selling of real estate properties as well as on income from rent payments from profit-yielding properties. The purchase of the property itself though is not taxed. This exemption from transfer tax payment in the United States is a very meaningful point to consider for Israeli real estate investors.
In light of the fact that the transfer tax in Israel keeps rising and rising with each additional property that is purchased, the gap in the expenses of a purchase deal in Israel in comparison to the United States can reach very significant sums.
This is in addition to the multi – apartment law, that threatens to impose a special taxation on landlord who own three or more apartments in Israel, in addition to the transfer tax that is paid with the purchase regardless.
Even though the law proposal is yet to be approved, this legislative potential is a point of consideration following which Israeli investors prefer not to take the risk of purchasing real – estate for investment in Israel.
In addition to the aforementioned information, it is important to know that there are deprecation regulations on residential real – estate in the United States, which mean that out of the tax that applies to the profits from the property, 3.63 percent a year are deducted as deprecation expenditures, along a period of 27.5 years.
This is while for commercial real – estate in the United States that is not indented for residence, it is possible to deduct deprecation expenditures at the rate of 2.56 percent a year, for the period of 39 years.
The meaning of this in actuality is that with the deprecation being relatively high, it takes a bite out of the profit margin that required reporting to the IRS, in a way that creates a situation where the tax owed on the property in the United Stated in the first few years, is very low.
Despite the lack of transfer tax in the United States – there is still taxation on profit yielding real – estate
The mere fact that in the United States a transfer tax is not collected when purchasing real – estate properties, does not mean that real – estate investments in the United States do not require meticulous tax planning.
In the United States there are taxes on the profits generated from the profit yielding property that could greatly influence the profitability of the deal in its entirety, and even render it worthless for the investor.
Taxation circles on profit yielding real – estate in the United States
Following are the three taxation systems in place in the United States that are important for every real – estate investor to be familiar with:
- Federal Income Tax – This is, in fact, the American counterpart to Israeli income tax. Any profit generated within the boundaries of the United States must be reported to the American tax authority (the IRS), and is subject to taxation on a federal level, in the case of a foreign investor as well. The tax assessment is dynamic and dependent on the personal information of every tax – payer and the specifications of the property. This is why it is advisable to do your tax planning with professionals in the field of American taxation.
- State Tax – In addition to paying federal tax on real – estate profits, there is a requirement to pay a state tax to the state in the United States in which the property is located. As each state in the United States has its own different tax laws and brackets, not every state is a worthwhile place for real – estate investment.
While some states in the United States don’t collect state taxes on real – estate profits at all, in other states in the United States the tax rate can be quite high. For this reason, this Is a factor that must be considered when you are thinking of investing in American profit yielding real – estate. - City Tax – the city tax in the United States is the equivalent (more or less) to the Israeli property tax. Here there are differences as well between the different cities and in some cases, there are also tax differences between the different areas of the same city. Although in general, the city taxes are usually not particularly high, it is still important to calculate them when considering a location for investment.
Remember: The United States tax laws apply to Israelis as well
Since the United States collects federal taxes, state taxes, and city taxes on profit yielding real -estate from foreign investors as well, it is important to make sure to pay the taxes on time. This is because failure to submit yearly tax returns as required, could lead to a withholding tax at the rate of 30 percent of your gross income.
In addition, even if your property is sold at a loss price, in the event that you have failed to report to the IRS on your taxes, you might find that a 10 percent withholding tax was enforced while selling the property.
This and more, if you are planning to do a business exit and make a transfer of funds to your bank account in Israel, you will be required to pay a capital gains tax at a 15 percent rate to the IRS. This is in addition to paying the Israeli income tax.
It is important to remember that Israel forgives capital gains tax of 25 percent on profits from investments. However, thanks to the existence of a tax treaty between Israel and the United States, the Israeli income tax collects only 10 percent from the Israeli investor that complete the 15 percent that were paid to the American IRS.
The Bottom Line
The Israeli investors could save very significant amounts of money, by investing in profit yielding properties in the United States. Nonetheless, this type of action requires planning ahead when it comes to taxation and preforming careful tax planning.
Therefore, it is recommended to carry out the first real – estate investment in the United States with the help of a company specializing in American tax consulting, like, for example, Mas America.
