A slew of different taxes makes real estate investment in the United States excruciatingly complex. And while tax planning, tax returns and tax reporting required in the US may be a mystery to the Israeli investor, noncompliance is met with heavy fines. To protect money invested in the US from draining away, many Israelis hire US investment tax accountants.
“Unlike the remainder of the international taxation landscape, the US tax system is based on citizenship,” explains Israeli CPA Ronen Marcovich, an expert in American taxation. “That is, anyone considered a US PERSON (defined as a US citizen, green card holder or US resident with a visa for work, relocation and so on) is subject to the US tax network. Irrespective of where they are domiciled, they must annually report their income and pay their taxes to the US’s Internal Revenue Service.”
Ronen Marcovich founded EMCA Marcovich Cohen in 2003, and manages it with Danny Marcovich (US tax department manager) from the Champion Motors Tower in Bnei Brak, and from branch offices in New York and Dallas. In its Israeli and American departments in Israel, the firm employs 54 people, representing some 6,000 clients — among them, companies, partnerships, real estate funds, US citizens and real estate investors active in real estate investment in the US, high-tech, startups and more.
Taxation in the United States
The annual report submitted to the IRS by anyone classed as a US PERSON must include their global income from all sources in and outside the US, notes Marcovich — all foreign bank accounts, trust funds and more. Inheritance tax is levied on this total comprising assets and property anywhere in the world (with an exclusion of $12.06 million per person).
What of non-US investors (the majority of Israeli investor)?
Strict rules also apply to those financially active in the US (usually owners of real estate or permanent concerns or branches), even if they are not considered US PERSONS. “They need an ITIN (Individual Taxpayer Identification Number) tax processing number, which people from our firm have IRS authorization to generate,” says Marcovich. “ITIN number-holders are required to file an annual report, but solely on their activity in the United States. They are subject to inheritance tax on their US property (with an exclusion of $60,000 per person), as well as on American securities, options, real estate and so on.”
The US tax system is further complicated, he notes, by federal taxes, state taxes, and even urban taxes in certain cities (New York, Los Angeles and Boston are among them), with tax liability varying according to different parameters.
He distills all this into basic guidelines:
1. SSN: Social Security Number, equivalent to Israel’s ID number (issued only to US citizens and US PERSONS)
2. ITIN: ID number for tax purposes, issued to non-US PERSONS who are financially active in the US (such as a real estate investors)
3. EIN: A tax number issued to a company or partnership operating in the US
4. LLC: Limited Liability Company, the US’s most common form of incorporation; it is a limited company that is transparent for tax purposes and, in fact, acts as a partnership. (The Israel Tax Authority treats this kind of incorporation differently)
6. LP: Limited Partnership
7. Branch Profits Tax: This applies, under certain conditions, to foreign companies operating in the US
8. Form 1040: US personal tax report
9. Form 1040-NR: Used by nonresident aliens, estates and trusts to file a US income tax return.
10. PFIC: Passive Foreign Investment Company — a non-US company whose income is passive
Partnered with EMCA — Marcovich Cohen