Jonathan Miller, a seasoned New York real estate investor, saw an opportunity to diversify his portfolio and plan for retirement. After careful research, he purchased a rental property in Jerusalem’s vibrant Nachlaot neighborhood, hoping to generate income and eventually use the property as a retirement home. But within a few months, his plan hit unexpected hurdles.
The purchase tax was nearly double what he anticipated. Hidden fees added another $20,000 to his costs. Then, just two years later, unexpected maintenance issues forced him to sell—triggering capital gains tax on a modest $35,000 profit.
By the time Jonathan untangled the tax mess in both countries, he was out thousands of dollars—and painfully aware it all could have been avoided.
The Purchase Process for U.S. Citizens
Buying property in Israel as a U.S. citizen isn’t overly restrictive, but it does involve several formal steps. Costs such as legal, agent, and bank fees usually add 5–8% to the purchase price. Foreign buyers can typically finance up to 50–60% of a property’s value, compared to 75% for Israeli residents. Mortgage options include fixed, variable, or mixed-rate loans in shekels or foreign currency, so it’s essential to budget accordingly.
Considerations Under Israeli Tax Law
Real estate transactions in Israel are subject to several types of taxes, some of which U.S. investors are accustomed to, and some they would not expect:
- Capital gains on the sale
- Income tax on rental income earned
- Typical municipal property taxes
- Purchase tax, which is assessed to the buyer on acquiring the real estate, and significantly increases the cost of purchase
- Betterment Tax may apply to increases in property value due to zoning or other planning changes.
Considerations Under US Tax Law
The US taxes its citizens and permanent residents on their worldwide income. Therefore, income generated on Israeli real estate will be subject to US tax. To ease the burden, there are provisions in place both with the US Foreign Tax Credit rules as well as within the US/Israel treaty to avoid double taxation.
These rules, which relate mainly to the foreign tax credit, can help reduce—but may not always completely eliminate—double taxation on rental income and on any capital gains from selling the foreign real estate. It is important to note that the foreign tax credit is not available for state income tax purposes.
With the Foreign Tax Credit, taxpayers may not have additional tax on income from Israeli real estate, but there will be additional disclosures. In particular, the IRS has a robust regime of filing requirements for US taxpayers to disclose their offshore assets. Failure to disclose in accordance with these requirements can result in severe financial penalties.
Trust and Estate Considerations
It is common for high net-worth individuals in the US to acquire assets, such as real estate, under a trust structure. This is done for estate-tax planning and asset protection purposes. The common approach does not work well in the Israeli legal environment as trusts are treated differently in Israel than in the US.
In the United States, trust law is based on the Common Law tradition and allows great flexibility in creating trusts and constructing complex mechanisms. Conversely, in Israel, trusts are regulated by a relatively rigid and non-current piece of legislation.
In the U.S., there is widespread use of a trust mechanism, whereas in Israel the use of trusts is not as common; especially since there is no estate or gift tax in Israel and the probate procedure of wills is fairly simple and inexpensive. Taxation of trusts in Israel is quite complex, especially when considering trusts for the benefit of international families.
From a US estate tax perspective, the worldwide assets of a US taxpayer are subject to the estate and gift transfer tax. Careful planning must be undertaken to minimize these taxes.
Conclusion
Investing in Israeli real estate as a U.S. citizen can feel like piecing together a complex puzzle. Tax rules and reporting requirements can be tricky, especially with new changes expected next year, so staying informed is essential. Work with cross-border experts, keep good records, and plan ahead. With the right approach, Israeli real estate can be a smart and profitable part of your portfolio.
Summary Table of Key Taxes and Rates (As of July 2025)
| Tax Type | Rate/Detail | Notes |
| Purchase Tax (Foreign) | 8% on first NIS 6,055,070, 10% above | Applies to property acquisition |
| Capital Gains Tax | 25% on profit, 2% surtax on gains > NIS 721,560 | Minus inflation, improvement costs |
| Rental Income Tax | Exemption up to NIS 5,654/month, 10% flat, or progressive with deductions | Options for landlords |
| Arnona (Municipal Tax) | Varies by city, based on size and location | Recurring local tax |
| VAT | 18% (not 17% as stated, effective January 1, 2025) | Applies to new construction, resale VAT-free |
| Betterment Tax | 50% on value increases due to zoning changes | Municipal tax |
This material has been prepared for informational purposes only, and is not intended to provide or be relied upon for legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.
