Sky-high real estate prices in Israel drive Israeli investors to seek real investments, mainly residential property, abroad.
If you’re an Israeli resident and you have produced income from real estate overseas, this overview will guide you through reporting requirements and tax compliance issues that apply to income from your overseas property.
Following comprehensive market research, and after obtaining the entirety of information about the costs, financing, and the expected yield, you buy an asset that meets your needs. Congrats! Now, it’s time to take a look at the duties that come with the purchase.
When does reporting apply?
1. In Israel, personal income from rent overseas requires reporting to the tax authority and filing an income tax statement.
2. If you own real estate abroad worth over 1,855,000 ILS (for 2017), you must report and file an income tax statement.
3. However, and even if your property overseas is worth below the aforesaid ceiling amount that requires filing a tax return statement, and it did not produce income in the first year after purchase we still recommended checking if additional acquisition costs exist. Filing a tax return statement, the tax authorities acknowledge the losses in the first year following the purchase, and taxpayers reserve the right to offset the losses against future income the asset will produce in the next year.
4. To note: double tax treaties between countries ensure that taxpayers do not pay double taxes. Providing taxpayers choose the second tax calculation and payment method, discussed below, they will pay taxes on the profit their investment produced in the country of purchase, while in Israel they receive tax credits on behalf of the taxes paid overseas (excluding France and Greece that have signed exclusive tax agreements with the State of Israel).
How are Israeli taxes calculated and how much, if any, national insurance you will pay?
In Israel, one can choose between two options for calculating the taxable income:
1. The flat 15% option:
For income tax purposes – choosing this option, taxpayers cannot offset passive losses from dividends or interest paid overseas against income from rent. Taxpayers pay 15% tax on their comprehensive income, deducting only depreciation expenses and receiving no tax credits on behalf of taxes paid overseas.
For Bituach Leumi (national insurance; health levy and social security) purposes – section 350(A)(7) in the National Insurance Ordinance determines that income from Israel and overseas rent that is subject to limited taxation rates (exempt, 10% in Israel, and 15% abroad), is exempt from paying Bituach Leumi.
2. The marginal tax option (net overseas income) requires filing a profit loss statement
For income tax purposes – this option requires calculating the comprehensive income an asset has produced and offsetting the total costs associated with the management and operating it (depreciation, management fees, maintenance, financing expenses, travel expenses, and any other expense that is directly related to the property). For this option, the first tax bracket is 31%, but it can go up to 47% according to an individual’s marginal income, plus an additional 3% surtax. Opting for this calculation and payment method, investors receive tax credits against taxes they had paid overseas. Also, this option offers offsetting other passive overseas losses.
For Bituach Leumi purposes – choosing the marginal tax option, income from residential rent abroad is considered passive income, and thereby subject to 12% tax on that portion of the income that is 25% higher than the average monthly wage.
A. When calculating income tax for the income produced from overseas rent, it does not matter whether property overseas is commercial or residential.
B. For Israel taxation purposes, depreciation expenses on overseas real estate are always calculated according to the Israel depreciation rules and regulations. Therefore, if the depreciation expenses had been calculated abroad, they should be recalculated.
Found a potential buyer for your property overseas? Sold real estate abroad? In Israel, you will pay capital gains and not land betterment tax!
The Israel Land Taxation Law applies to real property in Israel only. Therefore, when selling real estate overseas, taxpayers pay 25% capital gains (CG) tax (for properties purchased after January 1, 2003) and not land betterment tax.
When selling property abroad, taxpayers have to report the transaction to the Israel Tax Authority within 30 days. On behalf of the taxes paid overseas, sellers’ tax liability in Israel is granted tax credits.
If you have decided to sell an overseas property and buy another instead, please note that according to the Israeli Income Tax Ordinance (section 96), one cannot exchange or replace real estate abroad.
If you are considering an investment in real estate overseas, we are happy to recommend tax options that will best suit your needs.
We are looking forward to hearing from you.