Today the purchase of profit yielding properties in the United States does not include an acquisition tax charge. This is in contrast to what happens in Israel when purchasing a house or an apartment. There is no doubt that this is a major benefit for Israelis who are considering investments in American real – estate.
With that being said, it is important to consider the tax charges resulting from the profits made from the yielding properties in the United States, and the right ways to handle your finances when it comes to the American IRS, in order to avoid fines and withholding tax. In the following guide we will discuss this matter in depth.
What is important to know about owing taxes for real – estate investments in the United States?
As is the case in every reformed country in the world, the Unites States also collects taxes on profits that are generates within its borders. It is important to know that the IRS conducts tax audits from time to time on foreign investors and tend to fine those who avoid reporting their income and profits and don’t pay taxes as is required by law.
As a result, it is important to be aware of the instructions of the law in regards to taxation of American real – estate and the taxes that result from them. Later on, we will elaborate on how acquisition tax works in America and how its absence helps the Israeli investor make their profit margins bigger from an American real – estate purchase deal.
What is acquisition tax and when is it collected?
In the real – estate tax law in Israel, it is stated that purchasing rights in real – estate properties, including a residential apartment, private homes, commercial structures, or lots – requires the buyer to pay an acquisition tax. The tax in question is a rated one, whose brackets are updated by the ministry of treasury once a year according to changes in the index.
The acquisition tax is collected in from the buyer in addition to the price of the property itself, as a certain percentage of the property’s worth, while the amount of the tax owed is dependent on the characteristics of the property being bought and its worth.
The relevance of acquisition tax in America to the Israeli investor
The significant rise of real – estate prices in Israel during the past few years, has led to a very significant loss of ability for Israeli investors to generate profits for themselves from purchasing profit yielding real – estate in Israel. This is in spite of the fact that in actuality there has also been a rise in rent prices that are traditionally collected.
If in the not – so – distant past, investors in Israel could get a yearly return of around 8 percent of the price of the property they purchased, today in Israel it is very difficult to find a purchasing opportunity for profit yielding properties with a yielding potential surpassing 3 percent, calculated yearly. Because of this many Israeli real – estate investors set their sites on the United States.
It not just the extra yield from properties in the United States, which is higher than that which can be achieve in real – estate deals in Israel, but it is also the tax benefits in America, that can help the Israeli investor in saving large sums of money in the long run. A good example of this kind of saving, is apparent when it comes to acquisition tax in America, that in fact, does not exist.
How does acquisition tax work in America and how is it different from the acquisition tax in Israel?
In Israel the acquisition tax only goes up with every additional real – estate property that you purchase. This is the reason that the differences in expenses when buying properties are so large between Israel and the United States. In addition to that there is the third apartment law, that threatens to impose a special tax on those who purchase three or more apartments in Israel.
This is in addition to the acquisition tax that is paid regardless. In spite of the bill not being passed yet, it hangs like a dark cloud above the heads of the Israeli investors, which is why many of them prefer to abandon the local real – estate market in favor of investing in profit yielding real – estate investments in the United States.
The main difference between real – estate taxes in Israel to those in the United States, is embedded in the fact that in the United States there is no acquisition tax collected when purchasing apartments and houses.
In the United States it is customary to collect a tax on profits, and accordingly, a capital gains tax is collected when real – estate is being sold, in addition to the tax imposed on profits made from renting out a property in the United States.
With that, the purchase of the property itself is not taxed. This exemption from paying acquisition tax in America is a very significant consideration for real – estate investors in Israel.
Remember: in America the acquisition tax is irrelevant – but there are different taxes that you will have to pay
The mere fact that there is no collection of acquisition tax in America, does not mean that American real – estate investment does not require meticulous tax planning. The United States does indeed tax the profits made from renting out a property, and those could significantly affect the profitability of a purchase deal to the point that it is no longer profitable at all for the investor.
The systems of taxation on real – estate for investment in the United States
Following are 3 taxation system on profit yielding properties in the Untied States that every Israeli investor need 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 Income 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 Income 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.
As the United States collects federal, state, and city tax from foreign investors who have purchased profit yielding real – estate as well, it is particularly important to make sure to report an pay the tax in American on time. Failure to submit a tax report as required every year, could lead to a withholding tax at a rate of 30 percent of your income (gross).
Moreover, even if your property is sold at a loss, if you had avoided reporting and paying the American tax authorities, you might find that a 10 percent withholding tax was collected during the sale of your property.
Does possession of real – estate in the United States prevent Israelis from receiving tax breaks on real – estate in Israel?
Many Israelis who are considering investments in profit yielding properties in the United States are wondering whether purchasing American real – estate will negatively affect the exemption that they are entitled to when selling a single person apartment or the lower acquisition tax on the purchase of Israeli real – estate.
In article 1 of the land taxation law, “the right to land” is described as ownership of real – estate in Israel and as such, these rules are not applicable to the purchase of residential real – estate in the United States.
In summation
It is possible to save a lot of money when investing in real – estate in American when you go to create early tax planning. This is why it is heavily recommended to use the services of a company that specializes in American tax consulting and planning, before making a real – estate deal in the United States.
The team at the MasAmerica website will be happy to help you in this important matter and help you save spending on taxes in the United States. for a preliminary consultation call – contact us now!
