Airplanes, as they say, are fertile ground for unexpected encounters. A routine flight to one of the countries where I accompany Israeli developers put me next to Moshe, who happened to be sitting in the adjacent seat. Moshe, a pleasant man full of the joy of life, took an interest in my work after noticing me going over a legal agreement. It turned out that we were also staying at the same hotel, and from there the way to a shared taxi from the airport was short.
“I got a worrying message from my friend who looks after the apartment about a large tax charge, so I came to see what it was about,” he told me. “I don't understand how I got such a large charge, I was sure I was paying my taxes properly.”
I suggested he take the documents and payment demands he had received and consult a local accountant or lawyer. I suggested that our local office handle the matter, but Moshe declined and said he would manage on his own as he had until now.
Two days later I met Moshe at breakfast.
“I can't understand anything,” he said. “Yesterday I went to the tax office, and I couldn't understand what they want and how they calculate my tax.”
This time Moshe was a little less sure of himself and a little more open to help, and after breakfast he joined me for a meeting at the local office, where I asked one of the experienced lawyers to look into the matter and try to understand the source of the debt.
It turned out that Moshe's mistake was simple but critical. The reporting of the rental income had been done incorrectly in the digital system, and expenses had not been deducted as permitted by local law. A seemingly innocent mistake that led to a significantly inflated tax charge. Moshe tried to save a few shekels or euros on professional advice, and now he may pay a much higher price.
Warren Buffett, the billionaire investor, echoed in my head with his saying: “Don't try to outsmart the tax authority. They will always be one step ahead of you.”
Moshe's story highlights the importance of a deep understanding of tax law in the country where you invest, and of understanding the tax implications of real estate investments abroad. According to a Deloitte study, 63% of real estate investors abroad do not fully understand the tax law in the country where they invest.
Every country has its own tax laws, and sometimes even different regions of the same country have different tax laws (for example, among the various US states). It is important to understand these laws before you invest in real estate in a given country. In addition, in most countries it is possible to deduct certain expenses related to the property, such as depreciation, repairs and mortgage interest. It is important to understand which expenses can be deducted and how to document them properly.
And no less important than that - even if your property is located abroad, you are still required to report to the Israel Tax Authority. Failure to report may lead to fines and even criminal proceedings. The Income Tax Ordinance includes specific sections dealing with payment of tax on rental income abroad (and this is not like the tax paid on rental income in Israel).
It is also important to remember and be familiar with the fact that Israel is a party to double-tax treaties with many countries. These treaties are meant to prevent paying tax twice on the same income (meaning that if Moshe paid tax in the country where the apartment is located, the Israel Tax Authority will take the tax paid into account in calculating the tax he has to pay on this income in Israel), but they are sometimes complex and require in-depth understanding.
As the billionaire investor Warren Buffett once said, “Don't try to outsmart the tax authority. They will always be one step ahead of you.”.
As the well-known saying goes, “he who pays cheap pays twice.” Don't let Moshe's story be your story. Investing in real estate abroad can be very profitable, but it also involves risks. It is important to understand all the aspects, including the tax aspects, before making the investment. Don't hesitate to turn to experts who will help you make informed decisions. Invest in professional advice and enjoy the benefits of international real estate investments with peace of mind.
Stories are based on real situations, with identifying details changed. Not legal advice.
Translated from the Hebrew original. עברית