I don't like to gamble. I know there are people who enjoy the entertainment of a casino. I have never seen it as entertainment. Even when I went on a trip to the US and reached Las Vegas, I went in, made a round of a few of the hotels that have casinos, and in one of them I also set aside 50 dollars to test my luck, for the experience. No more than that. I have never managed to connect with the thrill of gambling, and certainly not with the cigarette smoke that is customary in casinos even today. Since the office provides services in several countries where there is extensive gambling activity, I have often accompanied a client who wanted to spend the evening at a casino.
I met Danny in a casino. He doesn't like to gamble either, but was dragged by his friends against his will to spend an evening at the casino. We both stood watching the gamblers at the blackjack table, and when we realized that we were both “from the same village,” I abandoned my client and he abandoned his friend at the table, and we sat in a quiet corner to talk. The conversation flowed and went on for quite a while, since both of us were appendages to gamblers who never had enough. We exchanged phone numbers and at the end of the long evening we parted, with Danny promising to call when he got back to Israel and to drop by the office for a cup of coffee.
A few weeks passed and Danny called and asked to schedule a meeting. When he arrived he told me that he has 2 apartments in 2 Eastern European countries, which he bought a few months ago. The price was attractive, the location good, and there is also a management company that seems to him to be functioning properly.
So what's the problem? I asked.
Danny doesn't understand why the management company deducted from the payment it transferred an item called taxes. It severely hurts the yield he understood he would get from the apartments. In Israel, he explained to me, I am not required to pay tax on the rental income I receive from the apartment I inherited from my parents.
As the conversation went on I understood that Danny had not been aware of the tax issue. The marketer had not bothered to detail or explain it. Danny hadn't asked.
I laid out for Danny the tax rates levied on rental income in the countries where he bought the apartments. I explained that every time he buys real estate in a foreign country he must check whether there is a tax treaty between that country and the State of Israel that prevents the payment of double tax; otherwise he will be required to pay tax on rental income both in the country where the apartment is located and in Israel.
Danny was surprised. Why should he pay tax in Israel on rental income, when the apartments bring in just a few hundred euros a month, which does not reach the tax threshold on rental income.
I had to explain to Danny the difference between owning a property in Israel and a property abroad with regard to rental income from a property in Israel as opposed to one abroad.
So what is important to know about the taxation of rental income abroad:
Reporting duty: to the Israeli tax authorities on any rental income abroad, even if you paid tax on the income in the foreign country.
Double-tax treaties: The treaties directly affect the tax calculation and the overall tax planning.
Knowing the double-tax treaties between Israel and the country where the property is located will let you examine the possibility of receiving a credit for tax paid abroad.
Advance tax planning: In Israel there are several tracks for taxing rental income abroad. It is important to compare the different tracks (the fixed 15% tax track on gross income, with no deduction of expenses (except depreciation), and the marginal tax track, in which you pay tax at the marginal tax bracket after deducting all expenses related to the property) in order to choose the most worthwhile option for you. Choosing the suitable track depends on a variety of factors, such as the level of income, the type of property, the expenses related to the property, and double-tax agreements.
Recognized expenses: Accurate documentation of all expenses related to the property (repairs, property tax, insurance and so on) will let you offset them against your income and pay less tax.
Properly managing the taxation of rental income abroad requires professional knowledge and advance planning. Seeking expert advice will help ensure compliance with all the legal requirements and make it possible to maximize profits.
Stories are based on real situations, with identifying details changed. Not legal advice.
Translated from the Hebrew original. עברית