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Taxation of real estate investments abroad

Meir Shua
Meir Shua

How does property taxation abroad work? The State of Israel taxes Israelis who own real estate abroad for investment. The amount of tax varies depending on how the investment is done (by independent Israelis or companies), the form of investment and other aspects. Proper planning, adapted to taxation law, can significantly reduce the tax burden. This important issue, which affects many Israelis who manage real estate transactions abroad, is explained in this article by attorney Michael Decker, a partner in our office and expert in real estate law and international taxation.

Investments in real estate abroad have become extremely common among Israelis. There are various reasons for this, including high real estate prices in Israel (alongside decreasing yields from real estate investments in Israel) and a trend towards increasing numbers of joint acquisition ventures abroad via dedicated companies. Although these are frequently investments that bring in quite respectable yields, it is important to take into account the fact that real estate investments outside Israel often have tax issues that demand attention.

Property taxation abroad

What is the tax in Israel on real estate investments abroad?

The answer to this question is more complex than generally thought. This is because it depends on many variables. For example, the tax rate on real estate investments outside Israel will vary dramatically depending on whether the investment is made by individuals themselves, or as part of a foreign company or partnership which purchases the property. There is also a difference between an investment done by making a loan to a company or partnership that invests the money, as opposed to direct purchase of the properties. The income from the investment will be classified based on these criteria, and the differences in taxation are likely to be extremely significant.

In the case of a loan, the income is generally classified as interest income, which is usually charged at a tax rate of 15% or 25%. In contrast, when the property is owned by individuals that are being taxed, the income source is generally from renting out the property. The taxation on rent may be set via fixed tax brackets, according to the Income Tax Code, or a fixed bracket of 15%. In this track it is generally possible to deduct depreciation expenses.

What happens when Israelis sell their real estate assets abroad?

In this case the taxation differs significantly from how a sales transaction is taxed in Israel, given that such a transaction abroad is subject to the Income Tax Code and not the Real Estate Taxation Law. The exact tax rate depends greatly on the specific variables and circumstances of each case. For example, when the property is under sole ownership of Israelis, the tax on the sale will be capital gains tax, which is currently at a rate of 25%. In contrast, if the property is held by a company, the tax on the sale may be company tax, which is currently at a rate of 23%. For private investors, there is also a difference regarding the date of purchase of the property. Properties purchased after 1.1.2003 are charged capital gains tax on the real capital following the investment. In contrast, properties purchased before this date are charged marginal tax on the profits before 1.1.2003, and capital gains tax only on the real capital that accumulated after this date.

International tax aspects

Real estate investments abroad are generally subject to both Israeli taxes and taxes in the country where the real estate is located. Accordingly, various international taxation issues arise, such as the requirement to act according to international tax conventions. It is important to know whether the country where the real estate is located has a convention to prevent double taxation with Israel. In such cases the country of origin will generally levy most of the taxation, and Israel will tax only the difference. It is also important to do proper tax planning, which will enable you to achieve the optimal taxation track according to the specific circumstances.

When dealing with real estate sale or purchase transactions, it is important to be aware of the specific characteristics of the foreign country. For example, certain countries have a purchase tax, while other countries do not. In order to plan taxation most effectively, it is important to take into account these aspects of taxation on real estate abroad as early as possible in the process. It is advisable and appropriate to consult with an attorney specializing in international taxation and real estate law before making the investment.

Taxation of real estate investments abroad – contact an attorney specializing in real estate law and internation taxation

In this article we explained important issues regarding taxation of real estate investments abroad, including the tax rates in Israel, the implications of selling a property abroad, and aspects of international taxation. If you need advice on this issue, the real estate experts in our office are available to you. Our legal offices, in Jerusalem and Tel Aviv, specialize in real estate law and representing investors in Israel and abroad. The office provides ongoing counsel on local and international taxation, as well as on many other issues. You can contact us at the telephone numbers and email address below.

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