For the past few years, the United States is considered one of the most attractive locations for real estate investments. As such, it is no surprise that the Israelis became particularly active in the American real estate market. That being said, even though buying real estate for investments in the United States is beneficial in most cases, it’s important to first consider the subject of taxation of ongoing revenue on profit yielding properties.
This is because the taxes collected on profits from rent on an apartment in the United States, as well as those collected on capital gain from selling properties, change from state to state, in a way that makes the profitability of the investment incredibly fluid. Different aspects of taxation are also a deciding factor in areas such as choosing the type of investment, the method of funding during the deal, and the output provided by owning the property, that is why it’s important to consult with an American tax consultant on this issue.
Ongoing revenue taxing and other factors to keep in mind when investing in profit yielding real estate in the United States
When we approach investing in profit yielding properties in the United States, there are, as mentioned, different taxing factors to keep in mind ahead of time, the main ones are as follows:
Taxing ongoing revenue in the United States
Foreign investors in the United States are required to pay ongoing revenue taxes on profit yielding real estate, while the tax rated that they are required to pay is heavily affected by the location of the profit yielding property within the United States.
The tax structure in the United States is built in a way that an investor with income from rent will first and foremost pay the IRS a federal tax, and in addition to that – depending on the specific state within the United States where the property is located, and the tax laws in that state, the investor might be required to pay a state tax as well as a city tax.
The end result of that could be significant tax debts in the United States. Therefor it is important to consider the existence of different options to reduce the rate of tax owing income in the United States, as much as is allowed.
For example, the tax authorities in the United States allow investors to deduct the property upkeep expenses from their taxed income, something that could possibly allow for a significant reduction of their tax debts. Some of these deductible expenses are: deprecation, mortgage expenses, and property maintenance expenses – so these could definitely influence the profitability of investing in the United States real estate market.
Taxing ongoing revenue in Israel
The state of Israel taxes its residents, and also on income cultivated outside of Israel. Taxing laws in Israel dictate 2 taxing systems for ongoing revenue from rent collected in the United States: The first option is taxation in a standard plan that includes tax payments according to the marginal tax percentage of tax payers in Israel.
The second option is taxing through a lower tax payment plan, meaning 15% tax. Each one of these tax plans have different pros and cons, which is why it is important to examine each investment separately, using the services of a certified American tax consultant.
The possession of property in the United States system
Possession of real estate in the United States can be achieved through direct ownership or alternatively indirect possession through the use of a local taxing entity such as an LLC company. Property possession through an LLC company has a number of positives in terms of taxation, that are reflected in the option to ease the burden of taxes when selling real estate, by selling the LLC company that owns the property instead of selling the real estate property itself.
It is also important to know that there are state in the United Stated that allow foreign investors that are not American citizens to invest directly in real estate properties in the United Stated, while other states in the United States allow foreign investors to invest in real estate inside state lines only through a local company. The pros of setting up an LLC company is the United States are clear as they present a solution in this area as well.
Estate tax liability
Estate tax is applied to the properties of a person who has passed away when the properties are passed over to the people that inherit them or wish to liquidate them. In this context it is important to know that the estate tax does not lie on the beneficiaries personally, but rather on the inherited property itself.
Since this tax rate is not decided according to the income rate of the beneficiaries of the property, the taxation is inevitably higher in a way that is detrimental to the profitability of real estate investment in the Unites States, not just to local investors but foreign ones as well. This is why precise tax planning is so important before beginning investments in the United States.
Funding channels for American real estate purchases
Purchasing American real estate is possible to achieve through personal wealth or outside funding. In spite of the fact that outside funding usually comes with paying interest rates, in some case the use of it can be more profitable in terms of taxes in comparison to purchasing real estate properties using personal wealth.
In this context, it’s important to know that in certain cases investing in American real estate mandates upholding a certain ratio between the investor’s personal wealth and the percentage of outside funding that they are depending on. This is another area that could affect the profitability of the investment in terms of taxation.
Does ongoing revenue taxation apply to rent from the United States in Israel as well?
The United States and the state of Israel are signed on a tax treaty that is designed to avoid a doubled tax when taxing ongoing revenue and capital gains of Israeli or American investors. In accordance with that, even though Israeli citizens are taxed on ongoing revenue from their income coming from the United States, a tax they are required to settle with the IRS, the Israeli tax authority joins in on the fun and is entitled to a certain share of the profits.
According to the tax treaty, Israel offers 2 taxing options on income from rent coming in from properties in the United States:
- The “regular” tax plan – where the tax is paid according to the marginal tax rate decided by taxation of passive income for net income (income excluding expenses). In this plan the tax payer is allowed to be reimbursed for the taxes paid in the United Stated for ongoing revenue from rent payments from the American property.
- Lower taxation plan – where a set 15% tax is paid for the gross income from rent, with an offset on the property depreciation expenses only. This is subject to the income from rent in the United States not being income from a business.
In this regard it is important to mention that taking advantage of the tax treaty between the United States and Israel and the use of an LLC company when investing in American real estate can greatly affect the attractiveness of the investment. That is why it is important to do preemptive tax planning before purchasing profit yielding properties in the United States.
Are there ways to minimize taxation on ongoing revenue in the United States?
Lowering the tax burdens from ongoing revenue in the United States can be achieved in many different ways, one of the popular ways to do this is by the “rerouting” of income to states with lower tax rates. In this way, for example, using an LLC company to invest or maintain the property, as long as these services are provided by an outside entity to the state where the property is – can allow for a reduction of tax liability.
That being said, each case must be examined separately, and it is very important to make sure ahead of time that tax plans of this kind don’t clash with the local tax orders in the state in the Unites States where your investment is located. This is in addition to the complex procedure that is involved when using a third – party company to handle the American real estate investment, which in itself involves significant expenses that could affect the profitability of the investment.
The most effective way of reducing taxation on ongoing revenue in the United States
When it comes to investment in the United States, it is important to examine each case separately in order to identify the most effective way to reduce tax liability. The experienced team of consultants at the America Tax website would be happy to assist you in completing professional tax planning that will help you maximize profits from your investment.
