7 Critical Rules for Tax on Real Estate Transactions
Real estate transactions in the United States represent a popular investment among many Israelis, but they involve significant tax complexities. In 2025, the laws and regulations regarding US real estate tax have become more complex, requiring a deep understanding of the American fiscal system. Proper understanding of tax obligations can save you thousands of dollars and prevent unnecessary legal issues.
Purchasing real estate in the US as an Israeli obligates you to comply with various tax requirements, from reporting the purchase, managing annual tax on income from the property, to selling the property and handling capital gains tax. Every stage of the process involves different tax obligations and strict reporting deadlines, non-compliance with which can result in heavy fines.
US real estate tax is affected by your tax status as an Israeli resident, the type of property purchased, the purpose of acquisition (investment vs. residence), and the property’s location. Understanding these critical rules will allow you to optimize your investment planning and minimize your tax burden.
Rule One: Understanding Your Tax Status as a Non-Resident
As Israelis purchasing real estate in the US, you are often considered “Non-Resident Aliens” for tax purposes. This status requires you to fulfill special tax obligations on income generated from US real estate properties. The distinction between resident and non-resident status is very critical as it affects tax rates, allowable deductions, and reporting requirements.
Non-residents renting real estate in the US are generally subject to a 30% tax on gross rental income unless they elect to treat the income as “Effectively Connected Income” (ECI). This election allows deducting operating expenses, depreciation, and other costs, which can significantly reduce the tax burden.
It is important to understand that even if you do not receive income from the property in a given year, you may still be required to file a tax return. This is particularly true if the property generates a tax loss you want to use later or if you have other income from the US.
In 2025, reporting obligations on real estate assets have become more stringent, and US authorities are tightening enforcement of tax laws on non-residents. Therefore, obtaining professional advice early on can prevent future issues.
Rule Two: Withholding Tax When Purchasing a Property
FIRPTA (Foreign Investment in Real Property Tax Act) is a US law that imposes a withholding tax on real estate transactions involving non-resident sellers. When you purchase a real estate property from a non-resident, you may be required to withhold 15% of the sales price and transfer that amount to the US tax authorities as a security withholding tax.
The law also applies in reverse: when you sell real estate in the US, the buyer may be required to withhold 15% of the sales price. This amount is not necessarily the final tax you will pay but a security measure the US government takes to ensure the tax owed is paid.
There are certain exemptions from FIRPTA, such as when the property price is below $300,000 and the buyer intends to use the property as a residence. Additional exemptions exist for certain types of transactions and properties.
In 2025, luxury properties valued over one million dollars receive special attention from authorities, and reporting requirements are getting stricter. It is important to be aware that failure to comply with FIRPTA obligations may result in delays in closing the transaction and heavy fines.
Rule Three: Managing Tax on Rental Income
Income from renting real estate in the US is subject to US income tax regardless of your Israeli residency. There are two main ways to handle tax on rental income: a flat 30% tax on gross income, or electing to treat it as Effectively Connected Income (ECI) and paying tax according to regular tax brackets after deducting expenses.
Choosing ECI is usually more advantageous as it allows deduction of expenses such as mortgage interest, property taxes, repair and maintenance costs, management fees, insurance, and depreciation. These deductions can significantly reduce tax liability and sometimes even result in a tax loss.
Tax losses from real estate can be used against other US income you have or carried forward to future years. This is a significant long-term advantage, especially if you plan to expand your US real estate portfolio.
In 2025, authorities emphasize the importance of maintaining accurate records of all income and expenses related to the property. It is recommended to establish a professional record-keeping system from day one of ownership.
Rule Four: Calculating and Planning Capital Gains Tax
Selling real estate in the US triggers US capital gains tax on the difference between the sales price and the adjusted purchase price. US real estate capital gains tax varies depending on the holding period: short-term capital gains (held less than one year) are taxed at regular rates, while long-term capital gains benefit from preferred rates.
Calculating capital gain is complex as it considers not only the original purchase price but also capital improvements made to the property, selling expenses, and depreciation claimed during the years. Depreciation claimed must be “recaptured” and taxed up to 25%, known as depreciation recapture.
Planning the sale timing in advance can save significant tax. For example, if you are close to completing your first year of ownership, waiting a few weeks can change the tax treatment from short-term to long-term capital gain, resulting in substantial tax savings.
Another important topic is Section 1031 exchanges (Like-Kind Exchange). This mechanism allows deferring capital gains tax by exchanging the property for a similar property within a specified time frame and under strict conditions.
Rule Five: Impact of Israel-US Double Taxation Agreement
The double taxation agreement between Israel and the US provides important protection against double taxation on the same income in both countries. However, this agreement does not exempt you from reporting and payment obligations in both countries but allows you to claim a tax credit for US taxes paid against Israeli tax.
Regarding real estate, the general rule is that the country where the property is located (in this case, the US) has the primary right to tax income from the property. Israel recognizes the tax paid in the US and grants a corresponding credit, so overall you pay the higher rate between the two countries.
It is important to understand that the double taxation agreement applies only if you are tax residents in Israel. If you are considered US tax residents (e.g., green card holders or US citizens), the situation is more complex and requires special professional handling.
In 2025, authorities in both countries exchange information regularly on real estate assets, so full transparency in reporting is the safest way to avoid future problems.
Rule Six: Special Reporting Requirements for Non-Residents
Owning real estate in the US requires special tax reporting both in the US and in Israel. In the US, non-residents receiving income from real estate must file Form 1040NR or 1040NR-EZ, depending on the specific situation. The filing deadline is June 15, 2025, for the 2024 tax year.
In Israel, reporting obligations include declaring the property itself on the foreign assets reporting form, as well as reporting rental income on the annual tax return. Israelis owning US real estate valued over one million shekels are subject to special reporting and Israeli real estate capital gains tax upon sale.
Reporting deadlines are critical and must not be missed. Late filing can result in heavy fines, loss of eligibility for tax credits, and even legal problems. It is advisable to plan the preparation of reports from the beginning of the year and not to wait until the last moment.
In 2025, authorities in both countries are increasing monitoring of foreign asset reporting, and the use of advanced technologies to detect non-reporting is becoming more common. Full transparency is the safest policy.
Rule Seven: Tax Planning for Future Generations
Owning real estate in the US affects not only your current tax status but also future generations. The US imposes inheritance and gift taxes on assets transferred to family members, and the laws differ for US citizens versus non-residents.
Non-residents are entitled to a limited inheritance tax exemption (about $60,000 in 2025), compared to multi-million exemptions for US citizens. This means a significant real estate asset may subject heirs to heavy US inheritance tax in addition to Israeli tax.
There are various ways to plan taxation for inheritance purposes, such as establishing trusts, holding the property through companies, or life insurance to cover tax liabilities. Each option has advantages and disadvantages, and choosing the right strategy depends on your personal and family situation.
US gift tax also applies to transferring real estate assets during life. Any gift exceeding $17,000 per person per year (2025) is subject to gift tax, with complex and strict reporting requirements.
Advance planning for transferring property to the next generation can save tens of thousands of dollars in tax and ease the process for family members. It is recommended to consult with tax experts and financial planners from the early stages of acquisition.
Real Estate Tax Saving Strategies
There are several proven strategies for saving US real estate tax that you should be aware of. Maximizing depreciation deductions is one of the most important ways to reduce tax burden. Residential property can be depreciated over 27.5 years, while commercial property over 39 years.
Accurate recording of all property-related expenses can yield significant deductions. Allowed expenses include mortgage interest, property taxes, insurance, repairs, maintenance, management fees, travel for property inspection, and some home office expenses.
Timing the sale can significantly affect the tax burden. Selling after one year and one day from purchase ensures treatment as long-term capital gain, benefiting from preferred tax rates. Coordinating the sale with a tax year where you have other losses can offset some capital gains.
Investing in capital improvements to the property not only increases its value but also increases the tax basis and reduces future capital gains. It is important to keep all receipts and documentation for such improvements.
Choosing the right legal ownership structure (individual, partnership, LLC, corporation) can influence taxation both in the US and Israel. Each structure has distinct pros and cons, and the choice depends on your investment goals and personal situation.
Special Topics for 2025
The year 2025 brings several legislative changes and new emphases in the field of US real estate tax. US authorities are tightening enforcement of FBAR and FATCA rules on foreign asset holders, including real estate. Improper reporting can lead to fines of up to 50% of the asset’s value.
Implementation of new digital systems facilitates authorities tracking international real estate transactions. Linked databases between countries enable rapid identification of reporting discrepancies.
The rising interest rate trend in the US affects the attractiveness of new real estate investments but also opens opportunities to refinance or write off existing asset portfolios. Property owners with low-interest mortgages can leverage the situation for refinancing or sale.
State tax laws differ across US states, with some imposing additional taxes on foreign property owners. It is important to familiarize yourself with specific legislation in the state where your property is located.
Changes to the Israel-US double taxation agreement are under discussion and may affect future taxation. It is advisable to stay updated on new developments and adjust your tax planning accordingly.
Common Mistakes to Avoid
One of the most common mistakes is failing to report rental income from the US or providing partial reporting. Even if rental income is low or the property was not rented during the year, there may still be a reporting obligation.
Another error is failing to maintain accurate records of property expenses. Without proper documentation, legitimate deductions cannot be claimed, resulting in excessive tax payments. It is recommended to establish a record management system from day one.
A lack of understanding of FIRPTA rules often leads to unpleasant surprises when selling the property. The 15% withholding can create cash flow issues if not planned for in advance.
Conducting complex real estate transactions without proper professional advice is an expensive mistake. Saving on consulting fees in the short term can lead to significant tax losses in the long run.
Failure to coordinate reporting between the US and Israel can result in double taxation or issues with authorities in both countries. Ensuring consistency between reports is crucial.
Tools and Technologies for Real Estate Tax Management
In the digital era of 2025, there are many technological tools that simplify managing US real estate tax. Specialized real estate accounting and bookkeeping software enable precise tracking of income and expenses, automatic depreciation calculation, and preparation of tax reports.
Specialized smartphone apps scan and organize receipts by tax category, saving considerable time during report preparation. Advanced OCR technologies automatically identify relevant details from receipts and classify them.
Cloud-based systems provide access to data from anywhere and easy information sharing with tax advisors. Automatic backups ensure no important data is lost.
Advanced tax calculators allow simulation of various tax scenarios and optimal planning of transactions. Capital gains calculations, effects of property exchanges, and long-term planning become accessible and easy to perform.
Secure communication software enables the transfer of sensitive documents to tax advisors safely and efficiently. Advanced encryption protects personal and financial information.
Public Relations and Interaction with Tax Authorities
Maintaining proper relations with tax authorities in the US and Israel is essential for successful real estate investment. Transparency and full reporting form the foundation for good relations and prevention of future issues.
In case of inquiries or tax audits, it is important to cooperate fully and provide all required information on time. Concealing information or partial disclosure may worsen the situation and lead to extended investigations.
Keeping all relevant documents for the legally required period (usually 7 years) allows quick responses to any inquiry. Systematic organization of documents saves time and prevents delays.
In case of disputes with tax authorities, it is important to act through professional representatives familiar with the system. Attempting to handle matters alone may lead to errors and exacerbate the situation.
Regularly updating yourself on legislative and regulatory changes enables quick adaptation and prevents unintentional violations. Following official publications and consulting experts when significant law changes occur is recommended.
Frequently Asked Questions About US Real Estate Tax
Am I required to report the purchase of US real estate if I do not receive income from it?
Yes, in Israel you must report ownership of the property even if it does not generate income. In the US, you may be required to report if you have other US income or wish to use tax losses.
What are the tax rates on rental income from property in the US?
Non-residents can choose between a 30% tax on gross income or treating income as ECI and paying tax according to the regular brackets (10%-37% in 2025) after deductions.
How can double taxation on the same income be prevented?
The Israel-US double taxation agreement allows claiming a credit for tax paid in the US against Israeli tax. Coordinating reporting in both countries is important.
What is the FIRPTA requirement and when does it apply?
FIRPTA requires withholding 15% of the sales price when selling US real estate if the seller is a non-resident. The amount is remitted to tax authorities as security for future tax.
Can I transfer US real estate to my children without tax?
Non-residents are entitled to a limited gift and inheritance tax exemption (about $60,000). Transfers exceeding this value are subject to tax and require advanced planning.
What happens if I miss reporting deadlines?
Late reporting can lead to heavy fines, loss of tax credit eligibility, and even criminal investigation in severe cases. Filing an extension request is advisable if needed.
How does the property’s location in a particular US state affect taxation?
Each US state can impose its own additional taxes. It is important to check state-specific laws where the property is located.
Investing in US real estate can be very profitable but requires deep understanding of tax obligations and proper planning. With the right tools and knowledge, you can minimize tax burden and maximize investment return. Remember that every situation is unique, and it is recommended to consult professional tax experts before undertaking significant transactions.