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Why Most Israeli Americans Fail at US Real Estate Taxation
In 2025, over 40% of Israeli Americans who purchased or sold real estate in the US reported incorrectly to tax authorities. The reason? Most people do not understand that real estate transactions in the US are subject to complex tax rules different from those in Israel, and a single mistake can cost thousands of dollars.
The obligation to report real estate transactions to American tax authorities has existed since 1913, with the enactment of the 16th Amendment to the US Constitution. However, the complex rules we know today developed primarily starting in the 1980s, when Congress decided to tighten oversight of foreign real estate investments.
FIRPTA: The Biggest Financial Trap
FIRPTA (Foreign Investment in Real Property Tax Act) from 1980 is the most important rule that most Israeli Americans ignore. The law stipulates that any sale of real estate in the US by a foreign person (including an American citizen residing abroad) is subject to a 15% withholding tax on the total sale amount.
Practical example: If you sold an apartment in New York for $500,000, the buyer must withhold and transfer to the IRS $75,000 (15% of $500,000) within 20 days of the transaction. This happens even if your actual profit is only $50,000.
The only exception to this rule is when the buyer intends to use the property as a primary residence and the purchase price is less than $300,000. In this case, there is no withholding tax obligation under Section 1445(b)(5) of the IRC.
The Costly Mistake: Confusing Profit with Sale Price
One of the most common mistakes I see in practice is confusion between the FIRPTA withholding amount and the actual tax owed. The 15% withholding is a “prepayment” to the tax authorities, not the final tax.
For example: You purchased an apartment in 2020 for $400,000 and sold it in 2025 for $500,000. Your profit is $100,000. At a long-term capital gains rate of 20% (for high-income earners), the actual tax owed is $20,000. However, the buyer withheld and paid the IRS $75,000.
In this case, you are entitled to a refund of $55,000 from the IRS, but only if you file a correct tax return on time. If you do not file, you will lose that money forever.
Real Estate Purchase Taxation: Unexpected Surprises
Unlike a sale, purchasing real estate in the US does not create an immediate tax liability. However, it creates various reporting obligations that most Israeli Americans do not know about. The first and most important is the requirement to report foreign property on Form 8938 (FATCA).
Any American citizen whose total foreign assets (including real estate) exceed $200,000 on the last day of the tax year, or $300,000 at any time during the year, must report this on Form 8938. The penalty for non-reporting starts at $10,000 and can reach $60,000 per year.
Another point many miss: If you purchased real estate with a mortgage, you must also report the debt. This is true even if the mortgage was taken from an American bank. The reason is that the property is located outside the US from the perspective of an American citizen residing in Israel.
Calculating Tax Basis: Where the Real Money Is
Tax basis is the most critical concept in real estate transactions, and it is where most people lose real money. Tax basis is not just the original purchase price, but also all investments you made in the property over the years.
Detailed example: You purchased an apartment for $300,000. Over 5 years you invested $50,000 in renovations (new kitchen, bathrooms, flooring), $15,000 in acquisition fees (attorney, broker, inspections), and $5,000 in selling fees. Your tax basis is $370,000, not $300,000.
If you sold the apartment for $450,000, the taxable profit is only $80,000 ($450,000 – $370,000), not $150,000 as most people think. This can save you thousands of dollars in taxes.
The problem is that most people do not keep receipts and documents from renovations, and ultimately pay taxes on amounts much higher than required. Capital gains taxation requires accurate documentation of every expense.
Like-Kind Exchange: The Legal Way to Avoid Taxes
Section 1031 of the IRC allows what is called a “Like-Kind Exchange” – exchanging similar properties without immediate tax payment. This is one of the most effective legal strategies for deferring capital gains taxes on real estate transactions.
The rule is simple: If you sold a business or investment real estate property and purchased a similar property within 180 days, you can defer paying taxes until a future sale. The savings can be enormous – instead of paying 20% capital gains tax, you invest all the money in the new property.
However, there are strict rules: The properties must be “like-kind” (any business real estate is considered like-kind to any other business real estate), the transaction must be conducted through a qualified intermediary, and there are strict timelines – 45 days to identify the new property and 180 days to complete the purchase.
State-Level Taxation: Additional Surprises
Beyond federal tax, most US states impose additional taxes on real estate transactions. The rates vary dramatically: California charges up to 13.3% state tax on capital gains, while Texas and Florida charge no state tax at all.
Practical example: A $100,000 profit from selling a property in California could cost you $33,300 in taxes ($20,000 federal tax + $13,300 state tax), while the same profit in Texas would cost only $20,000. That is a difference of over $13,000!
Important point: Even if you are a resident of Israel, you still owe American state tax on properties located in that state. Taxation in different states requires a deep understanding of local laws.
Foreign Tax Credit: How to Avoid Double Taxation
One of the most common questions I receive is: “Do I pay taxes in both Israel and the US on the same property?” The complex answer is that it depends on the specific details of the transaction and how you report it.
American citizens residing in Israel can receive a credit for taxes paid in Israel through Form 1116 (Foreign Tax Credit). However, the credit is limited to the lesser of the tax paid in Israel or the US tax on that income.
In practice, this means that if the Israeli tax rate is lower than the US rate, you will pay the difference to the US. For example: If Israeli tax is 25% and US tax is 20%, you receive a full credit. But if Israeli tax is 15% and US tax is 20%, you pay an additional 5% to the US.
Form 1116 is complex and requires accurate calculations of taxes in each country.
Critical Deadlines You Cannot Miss
Real estate transactions involve strict deadlines that missing them can be costly. The most important deadline is April 15, 2026 for filing a tax return for the 2025 tax year. However, there are additional deadlines that most people do not know about.
For example, if you conducted a Like-Kind Exchange, you have only 45 days from the sale date to identify the replacement property and 180 days to complete the purchase. There are no extensions or exceptions to these rules. Miss the deadline? You pay taxes on the entire profit.
Another important deadline to remember: If you sold a property and had taxes withheld under FIRPTA, you have 4 years from the date of filing your original return to claim a refund. After that, the money stays with the IRS forever.
Bottom Line: What This Means in Practice
Real estate transactions in the US are far more complex than most Israeli Americans understand. The most common mistakes I see are: misunderstanding FIRPTA, failing to keep accurate records of tax basis, and missing opportunities to save taxes through Like-Kind Exchange.
The real money is in the details: keeping every receipt from renovations, understanding the differences between states, and properly planning timelines. One mistake can cost thousands of dollars, but proper planning can save even more.
My professional recommendation: Before any real estate transaction in the US, consult with a tax expert who understands American tax rules. The investment in professional advice will pay for itself many times over.
For more information on American tax rules, see the IRS guide for international taxpayers and Form 8938 instructions.