My client, a United States citizen purchasing an apartment in Jerusalem, wanted to understand the tax implications of generating rental income from the apartment that he was buying. I reached out to Philip Stein of Philip Stein & Associates Ltd., whose firm is focused on helping U.S. citizens (tourists and olim alike), to address this question.
Philip explained that there is no tax obligation in Israel if you rent out your apartment for less than 4,680 NIS per month. If the monthly income is above 4,680 NIS, then there are two tax options: The first option is convoluted and requires filing a long form tax return. A preferable option is to pay a 10% tax on the gross rental. So assuming you receive a monthly rent of 6,000 NIS, you will pay Israeli taxes of 600 NIS per month or 7,200 NIS per year. This option exempts you from filing a tax return; a simple short form is all that must be filed when making the annual tax payment.
Now that we understand the Israeli tax obligation, how does this income get reported in the U.S.?
Philip explained that you can declare to the IRS your Israeli rental income on a net basis, which, using the same example as above, is 72,000 NIS less all property expenses including interest on mortgage payments, depreciation, property management fees and repair expenses – plus you will receive a credit for the 7,200 NIS income tax paid to the Israeli tax authorities.
One last important issue to discuss: Israeli capital gains tax laws are different than in the United States. In Israel you can sell one residence every four years without paying capital gains taxes. Let’s say you buy a home for $500,000 and then sell it five years later for $800,000. If you haven’t sold any other home in Israel during the previous four years, then there is no Israeli tax on the $300,000 capital gain. In the US, however, the capital gain will be subject to tax.
If you have any follow up questions, feel free to email Philip directly at email@example.com. I also recommend that you take a look at his excellent website, www.pstein.com, which is chock full of helpful information.
“My Israel Home” is a real estate agency focused on helping people from abroad buy and sell homes in Israel. Gedaliah is currently in the US running panel workshops in eight communities across NY and NJ. Please contact him for more information at firstname.lastname@example.org.