Is there an obligation to report? Should an attorney be consulted in Israel or abroad? What follows is a guide to overseas real estate investments – a professional article.

At the end of the summer, like most Israelis, we vacation abroad. This time we chose to take the kids on a trip to Poland, the green country.

On the flight I sat separately from my wife and kids, and sat in the same row but on the other side of the aisle. Sitting next to me was a young man named Dan (the name has been changed to preserve anonymity. A few minutes from the moment he sat down, and even before the plane took off, he began taking out maps of different cities around the world and marking them with numbers. We soon had a conversation after I asked him why he was marking numbers on the maps (I am naturally curious). Dan told me that he wanted to buy a residential building for investment and to take advantage of the rental income, and that he is now considering the feasibility of investing in various places around the world. His eyes lit up when he heard that I was an attorney who deals with real estate taxation and appraisals. He began to ask me many questions. Most of his questions dealt with locating real estate for investment and tax considerations.

I explained to Dan that since the yields are low in Israel, bank interest rates are negligible, and the country imposes laws that are not good for real estate investors. When abroad, it is possible to purchase investment properties with relatively low initial capital (even for only $ 50,000). In fact, investment in real estate abroad has become an accepted alternative for those interested in achieving a higher rental income yield than what would be achieved from investing in real estate in Israel.

Of course, there are many and varied considerations for purchasing investment real estate. Anyone wishing to invest in real estate abroad should consult with an international taxation expert. This expert will take into account all relevant information and provide a real representation of the expected taxes to be paid from the real estate investment transaction. Investors will receive a full and correct picture of the profits expected from the transaction after taxes have been paid. In this regard, I must emphasize that most of the real estate investment companies in Israel, which offer real estate investment opportunities abroad and even assist in locating properties for investment, do not usually provide a suitable answer to tax law questions that should be asked before purchasing investment real estate abroad – it’s very important to be aware of this.

Should a local lawyer be hired abroad, or should an Israeli lawyer be sufficient for the purchase of investment property abroad?

Each country has its own domestic laws, and it is therefore advisable to use the services of a local lawyer who is proficient in the local language and relevant laws for foreign investors. In this regard, it should be noted that in Israel there are lawyers who are familiar with foreign investment laws and who provide legal services on these laws; this pool of lawyers, divided by country, can be located on the Israeli Bar Association website.

We now return to our story. I explained to Dan that proper tax planning is a critical and essential stage in buying investment real estate abroad, as is the case when purchasing investment real estate in the local market.

Reporting obligations and paying taxes for investment real estate transactions abroad.

Israeli residents are required to report and pay taxex in Israel for income generated in Israel and abroad (personal income tax). Therefore, an Israeli investor must report and pay tax on income derived from properties purchased abroad. It should be noted that there is an obligation to file an annual report and to report on the holding of property abroad when the total value of properties abroad – at any time in the tax year – is 1,850,000 NIS or more (this is correct for the 2016 tax year).

If so, the tax aspects that apply in Israel and abroad should be examined first and foremost. It is necessary to check whether a tax treaty exists between Israel and the country in which the property will be purchased, so that there is not a double taxation error. Insofar as there is a tax treaty between the two countries, the provisions of this convention are greater than the domestic law of the states, since under Section 196 of the Income Tax Ordinance, the provisions of the tax treaties to which Israel is party to prevail over Israel’s domestic law. This principle, according to which the provisions of the tax treaty prevail over domestic law, is accepted in many countries around the world. For this purpose it should be noted that in most tax treaties, the first tax rights will be granted to the country in which the investment real estate is located.

In addition, it is also necessary to ascertain whether in the country where the property is to be purchased, a purchase tax is imposed (for instance, a purchase tax of 3% applies in Montenegro), whether capital gains tax is levied on the sale of the property, in addition to capital gains tax to be paid in Israel, as well as whether investors are required to pay tax on rental income from leasing the property. For example, rental income in Germany is subject to differential tax rates based on the amount of rental income, with income up to a certain amount not taxable in Germany. Therefore, it is also desirable to examine whether in the country in which they wish to purchase property, there is a tax exemption on rental income, and if so, the ceiling of the exemption should be noted. If one wishes to obtain investment real estate in the United States of America, investors should also take into account that in addition to the federal tax payable on monthly rental income, state taxes may also be required – if there are any.

Regarding taxation of rental income, it should be noted that a resident of Israel who collects rental income from foreign properties is required to pay taxes in Israel (as stated, the tax is on a personal basis), when the investor is entitled to choose one of two tracks:

• The regular tax track – in this track, rental income will be added to the taxable income of the Israeli investor, such as income from salary, and the total income will be taxed at the marginal tax rate (e.g., according to the tax brackets set out in section 121 (a) of the Income Tax Ordinance). In this track, the investor is entitled to deduct from rental income any expenses incurred for maintaining the property (such as municipal taxes, renovations, repairs, depreciation, etc.), and it is possible to receive a credit in the amount of the foreign tax paid.
• Reduced Tax Track – In this track, the Israeli investor will be liable to a 15% tax on any rental income when the investor is not entitled to deduct any expenses, excluding depreciation, and is not entitled to offsets, deductions, or exemptions from rental income or taxes. Additionally, it is not possible to receive a credit in the amount of the foreign tax paid.

Therefore, even in order to choose the route for national taxes, it is recommended to consult with an expert in the international taxation field. This expert can recommend the appropriate tax track for the investor, according to the investor’s individual circumstances.

We return, again, to our story. Dan shared that he intended to purchase a number of apartments which would be rented through sites like AIRBNB or BOOKING. I explained to Dan that since income from short-term rentals of investment property may be considered income from a business, the Tax Authority’s position is liable to deprive him of the possibility to choose the reduced tax track for this purpose, and such rental income will be adjusted according to the regular track only (e.g., according to the marginal tax rate).

Additionally, consideration should be given to the number of properties from which rents accrue for the Israeli investor. In this regard, it is appropriate to present the words of Mr. Moshe Asher, Tax Authority Chairman, who addressed this issue at the 2017 Annual Accountant’s Conference, saying his position is that “renting up to 5 apartments is passive, while renting up to 10 business days and renting over 10 apartments is businesslike. ” These remarks were made regarding apartment rentals in Israel, especially regarding the beneficiary track of 10%. However, it should be emphasized that opinions are divided on this matter, and that the District Court even recently ruled that rental income of 20 apartments does not constitute income from a business. The Supreme Court’s decision on the matter is expected soon.

As mentioned above, there are many questions to ask and inquire about before embarking on the adventure of buying overseas real estate, which has a decisive impact on the feasibility of the deal. So consult with experts in the field of international taxation, not necessarily companies that offer overseas real estate investment opportunities.

The following article will deal with capital gains taxes, as derived from the sale of property purchased abroad and related issues. Many thanks to attorney Michal Levy, who specializes in the field of international taxation, and who has contributed extensively to the creation of this article.

*Advocate Ido Shaham is a real estate tax attorney and land assessor, who serves as chairman of the Taxation Committee at the Assessors’ Bureau.