7 Critical Rules for Tax on US Real Estate Transactions: Comprehensive Guide for Buying and Selling 2026
7 Critical Rules for Tax on US Real Estate Transactions: Comprehensive Guide for Buying and Selling 2026
US real estate transactions represent an attractive investment for many Israelis, but they involve significant tax complexity. Understanding the tax implications of buying and selling US real estate is critical to financial success and to avoiding problems with tax authorities. In this guide, we will review the seven most essential rules that every US real estate investor must know.
First Rule: Understanding Your Tax Status in the US
Before any US real estate transaction, it is crucial to understand what your tax status is in the US. Israeli residents who are not US citizens are considered Non-Resident Aliens (NRA) for tax purposes. This status directly affects tax rates, allowable deductions, and required reporting when conducting US real estate transactions.
Another important distinction is between active and passive investment. Renting out US real estate is generally considered a passive investment, but in some cases it may be considered an active business. This definition affects how you are taxed and the ability to deduct losses.
In 2026, it is important to ensure that you are familiar with all changes in US tax laws that may affect US real estate. These changes may include changes in tax rates, exemption thresholds, and reporting requirements.
Second Rule: Taxation of US Real Estate Purchase
Purchasing US real estate in itself does not create a direct federal tax liability, but it does create future reporting and tax obligations. At the time of purchase, it is important to understand the desired legal structure for holding the property – whether as an individual, through an LLC, or through another structure.
Transfer Tax is a local tax collected in most US states when purchasing property. The tax rate varies between states, and typically ranges from 0.1% to 2% of the property value. This tax is added to purchase costs and is not deductible from income tax.
It is important to plan ahead for the source of financing for purchasing US real estate. Transferring funds from Israel to the US may be subject to FBAR and Form 8938 reporting, especially if the balance of foreign accounts exceeds the amounts specified by law.
Third Rule: Taxation of Rental Income from US Real Estate
Rental income from US real estate is taxable both in the US and in Israel, but you can take advantage of the treaty for prevention of double taxation. In the US, rental income is taxed at a rate of 30% on gross income, or alternatively you can choose taxation at the regular income tax rate on net income.
Choosing taxation at the regular income tax rate requires filing an annual tax return in the US (Form 1040NR). This choice allows deduction of maintenance expenses, management, insurance, and even depreciation. Depreciation is a special deduction that allows you to deduct part of the property cost each year, even without an actual expense.
For Israeli residents purchasing US real estate, it is important to understand that they will be required to report the income to Israeli tax authorities as well. However, you can credit the tax paid in the US against the tax liability in Israel, under the treaty for prevention of double taxation.
Fourth Rule: FIRPTA – Tax on Sale of US Real Estate
Foreign Investment in Real Property Tax Act (FIRPTA) is a federal law that imposes tax on capital gains from the sale of US real estate by foreigners. In 2026, the withholding rate is 15% of the sale amount (or 10% for properties under $1 million that will be used as the buyer’s residence).
It is important to understand that FIRPTA is a withholding tax, meaning it is withheld at the time of sale by the buyer or brokerage company. The tax is withheld even if the sale does not yield a profit, and even if it yields a loss. Therefore, filing an annual tax return in the US is essential to receive a refund of the excess tax paid.
There are several exceptions to the FIRPTA withholding requirement, such as sale to a buyer who intends to use the property as a permanent residence. However, these exceptions require meeting strict conditions and proper documentation.
Fifth Rule: Accounting for State Taxes
In addition to federal tax, most US states impose additional tax on real estate income and on capital gains from its sale. State tax rates vary significantly – there are states with no income tax at all (such as Florida and Texas), and there are states with high tax rates (such as California and New York).
Some states offer tax benefits to foreign investors or impose additional restrictions. For example, the state of California imposes a tax of 3.3% on the sale of real estate by foreigners, in addition to federal tax. Other states may require special registration or filing of additional reports.
When planning an investment in US real estate, it is important to examine the total tax significance, which includes both federal tax and state tax. In some cases, a difference in state tax can significantly affect the return on investment.
Sixth Rule: Utilizing the Treaty for Prevention of Double Taxation
The treaty for prevention of double taxation between Israel and the US allows Israeli investors in US real estate to take advantage of significant tax benefits. This treaty allows crediting the tax paid in the US against the tax liability in Israel, and sometimes even grants reduced tax rates.
According to the treaty, capital gains from the sale of US real estate will be taxed primarily in the country where the property is located (US), but Israel will credit the tax paid in the US. Rental income will be taxed in both countries, but Israel will credit the tax paid in the US up to the amount of Israeli tax.
To enjoy the treaty benefits, you must prove residency in Israel and meet certain conditions. In some cases, it will be necessary to obtain a certificate of residency from Israeli tax authorities and submit it to US tax authorities.
Seventh Rule: Advanced Tax Planning and Legal Structures
Advanced investors in US real estate use sophisticated legal structures to optimize tax liability. LLC (Limited Liability Company) is the most popular structure, providing personal protection from liabilities and allowing flexibility in taxation.
An LLC owned by a single foreigner is considered a Disregarded Entity for US tax purposes, meaning taxation passes directly to the owner. This structure is relatively simple and does not require double taxation. However, an LLC requires filing annual reports and ongoing legal maintenance.
For investors on a large scale, using a foreign trust or more complex structures may be beneficial. These structures require specialized professional advice and higher maintenance costs, but can provide significant tax savings in the long run.
Reporting Requirements and Critical Deadlines for 2026
Investors in US real estate are subject to multiple reporting requirements both in the US and in Israel. In the US, filing Form 1040NR is required by June 15, 2026 for those who chose taxation at the regular income tax rate. For those obligated only to withholding tax, there is no annual filing requirement.
FBAR (Foreign Bank Account Report) is required to be filed by April 15, 2026 (with the possibility of extension until October 15) if the total balance of foreign accounts exceeded $10,000 at any time during the year. Form 8938 is required to be filed together with the US income tax return if foreign assets exceed the specified amounts.
In Israel, you must report the property on the annual return and the income from it. Changes in ownership of the property, such as sale or purchase, may require additional reporting to tax authorities.
Common Mistakes to Avoid
One of the most common mistakes is not filing required reports on time. Late filing of FBAR or Form 8938 can lead to heavy penalties, even without actual tax liability. These penalties can reach tens of thousands of dollars and sometimes even more.
Another mistake is misunderstanding the implications of FIRPTA. Many assume that the tax withheld at the time of sale is the final tax, and avoid filing an annual return. In many cases, filing the return will lead to a significant tax refund.
Holding US real estate in personal names instead of in an appropriate legal structure is also a common mistake. This structure exposes the investor to personal liabilities and sometimes even increases tax liability.
Income from Commercial Real Estate and Special Exceptions
Commercial real estate in the US is subject to more complex taxation rules than residential real estate. Income from commercial real estate may be considered business income, which changes reporting requirements and tax rates. In some cases, the income will be subject to Self-Employment Tax.
Holding commercial properties through a REIT (Real Estate Investment Trust) creates different tax implications. Most REITs distribute dividends subject to withholding tax of 30%, but the treaty for prevention of double taxation may reduce the rate.
Real estate properties considered important to national security or for special purposes may be subject to additional purchase restrictions and special reporting requirements. You should check in advance whether the desired property falls under these categories.
Long-Term Tax Strategies
Effective tax planning for US real estate includes several long-term strategies. One of them is using a 1031 Exchange, which allows deferring capital gains tax by exchanging a property for a similar property. However, a foreigner who is not a US resident cannot fully benefit from this benefit.
Another strategy is timing sales to optimize tax liability. Selling in a tax year when income is lower can lead to significant tax savings. Additionally, you can plan losses from other properties to offset gains.
For families with children studying in the US, there are options to transfer partial ownership of US real estate to children as a gift. This strategy can reduce the family’s overall tax liability, but requires careful planning to avoid problems with gift tax.
Impact of Legislative Changes on 2026
The year 2026 brings with it several legislative changes affecting US real estate investments. Capital gains tax rates remained stable, but there were changes in the exemption thresholds for gift and estate tax. These thresholds are relevant to those planning to transfer US real estate to the next generation.
Reporting requirements have been tightened, especially regarding assets held through foreign legal structures. Beneficial ownership definitions have been expanded, and penalties for non-reporting have been increased. It is important to ensure that all legal structures comply with the new requirements.
Several US states have introduced new taxes on foreign investments in real estate, especially in large cities and expensive real estate areas. These changes affect the feasibility of the investment and must be included in return calculations.
Working with Specialized Tax Advisors
The complexity of US real estate taxation requires working with a specialized professional team. A tax advisor who knows both systems – Israeli and American – is essential to the success of the investment. The advisor can help plan the appropriate legal structure, prepare required reports, and optimize tax strategy.
An attorney specializing in US real estate can help with advanced legal structures, protection from liabilities, and handling legal issues that may arise. Close cooperation between the tax advisor and the attorney is critical to planning efficiency.
A US accountant licensed to represent clients before the IRS can handle problems that may arise with tax authorities. In case of audit or inquiries, it is important to have a professional representative who knows the law and procedures.
Frequently Asked Questions About Real Estate and Tax in the US
Do I have to report the purchase of a property in the US to Israeli tax authorities?
Yes, you must report the property on the annual return in Israel as a foreign asset. Reporting is required even if the property does not generate income. Non-reporting can lead to penalties and problems with tax authorities.
What happens if I sell the property at a loss?
Even in a sale at a loss, FIRPTA will be activated and tax will be withheld at source. However, filing an annual return in the US will allow you to receive a full refund of the tax withheld, and even to deduct the loss from other income or carry it forward to subsequent years.
Is it better to hold property personally or through an LLC?
Holding through an LLC provides protection from personal liabilities and may allow more advanced tax planning. However, an LLC requires ongoing maintenance and additional costs. The decision depends on the size of the investment and the client’s goals.
What is the final tax rate on investment in US real estate?
The final rate depends on the state where the property is located, the type of income, and the scope of the investment. On average, you can expect a rate of 15-25% on capital gains and 30% on rental income (before crediting foreign tax in Israel).
Can I get bank financing in the US as a foreigner?
Yes, but the terms are more difficult. Banks typically require a higher down payment (25-40%), proof of stable income, and sometimes additional guarantees. Financing interest rates are also higher than those offered to US residents.
What happens in inheritance of US real estate?
US real estate of a non-resident is subject to US estate tax if its value exceeds $60,000. The tax rate can reach up to 40%. Proper planning in advance can minimize or eliminate the tax liability.
Can I live in the property I purchased in the US?
Yes, but you must understand the tax implications. Living in the property may change your tax status in the US and affect eligibility for various tax benefits. You should obtain professional advice before making such a decision.
Investing in US real estate can be highly profitable, but requires deep understanding of tax rules and bureaucratic requirements. With proper planning and appropriate advice, you can realize the full potential of this investment while minimizing tax liability and legal risks.