Salient points for Israelis buying real estate in America:
Some clients may want to buy real estate in America. Here are some main points:
A person who enters America doing business such as real estate is required to put in an American report, which is either a Form 1040 if he is an American citizen or a Form 1040-NR if he is not. An Israeli who puts in a Form 1040-NR because he is not a citizen of America is required to apply for an ITIN number. This is like a social security number.
If our client is not an American we must count the number of days he stays in America, because after a certain number of days in America he may become an accidental resident of America. This then would require him to report all of his income that he earns on his American report. That is not recommended so we want to avoid that for our clients.
Some Israeli clients may want to open up an American corporation to buy American real estate with this. Or, our Israeli clients may want to open an Israeli company to buy real estate with that. Finally, our Israeli client may want to buy real estate in his own name in America. In any way, it is smart to look at IRS Form 8832 {that must be put in within 75 days of the purchase becoming relevant}, which gives the client the choice between being considered an American corporation, a disregarded entity, or . . .
Buying real estate with an American company:
An American LLC is called a disregarded entity, so if a client buys real estate with that: this is like buying with his own name. However, IRS Form 8832 may give the client rights to be considered a corporation. This is important down below, because Israelis buying real estate in their own name is not a favorable tax position {please see below}. On a typical American report, real estate can be a passive activity or an active activity, while the gains and losses from sales can be taxed as capital gains or as business income and losses. The way the company is structured it is important to decide these things beforehand. Before buying the real estate. IRS Form 8582 designates the real estate as either a passive or an active activity. Capital assets are held for rental income, and when you sell them they are taxed at better rate, while business assets are those built or renovated for sale. When they are sold later for a profit they are taxed as business income.
Buying real estate in the client’s own name:
If our client has a social security number {or ever had a “green card”} he is required to put in IRS Form 8858 because the client doing business in America is considered a ‘foreign disregarded entity.” If the client buys shares in an American partnership that owns real estate, that client will be required to put in IRS Form 1040-NR with Schedule E. Then, if those partnership interests are ever sold, the client will receive a report of the gains or losses on IRS Form K-1. He will then be required to put in IRS Form 4797 and Form 1040-NR Schedule D.
When our Israeli client {or American living here in Israel} owns real estate, if he ever gives that to another Israeli citizen or resident {including by inheritance} up to 40% tax may be imposed. A FIRPTA and low threshold gift tax apply in this case. For these reasons, we do not recommend buying real estate in the client’s own name or any other disregarded entity.
Buying real estate in the client’s own name or an Israeli company buying real estate:
Any sales of real estate owned by Israeli citizens or Israeli corporations are withheld at 15% tax called FIRPTA. This will be withheld by the attorney at the point of sale {the closing}. This tax can sometimes be brought back to our client with careful and skillful work on the tax reports as a refund.
Buying real estate with an Israeli corporation:
Buying American real estate with an Israeli corporation protects the client from gift and estate taxes. However, an Israeli company may have “effectively connected income” if it buys real estate in America. Then the Israeli corporation would be liable for full American corporate tax just like an American corporation. However, the Treaty with America, with IRS Form 8833, may allow the Israeli company to fit in the lower tax rates if it has no permanent business establishment in America.
The client should ask us to help him, if he receives a W-8 Form to fill out. This is because those who pay the Israeli corporation may enforce withholdings of 30% income tax from all the payments. If the corporation income is not effectively connected income, sometimes it becomes FDAP income. Then, our client will receive IRS Form 1042-S at the end of the year and he can always put in a report to try and get the withheld taxes back as a refund.
And also, if the client is an American citizen who owns the Israeli company buying real estate in America, as an owner of a “controlled foreign corporation” he will have to contend with G.I.L.T.I. tax, Subpart F income, FDII and the FBAR report to the financial crimes unit FINCEN. All the taxes in this article are all offset by ample and adequate deductions when we take very good care to provide extremely high quality tax and accounting services to our clients by doing careful, thorough and complete work. Weinstein clients are in good hands.
