Rental Income in the US: US Taxation, the Israel-US Tax Treaty, Tax Credit and Reporting to the Israel Tax Authority

1How does the US tax rental income of an Israeli resident?

By default, the US collects 30% of gross rent through withholding at source: the tenant, or in practice the management company, remits the tax to the IRS before the money reaches you. Under this method there is no deduction of expenses, so it almost never pays off for an investor who has a mortgage, maintenance expenses and depreciation.

The alternative is the election under Section 871(d): treating the income from the real property as income “effectively connected” with a US business (ECI). After the election, expenses are deducted, and only the net income is taxed at the regular graduated rates of an individual, which reach up to 37% (as of 2026). The election does not make the investor “engaged in a US business” for other purposes.

• How to elect: you attach a statement to the 1040-NR return (or to an amended return) for the year of the election. The statement includes the fact of the election, the list of all the real property in the US, the extent of ownership, the location, material improvements, dates of holding and the income from each property.
• Validity: the election continues to apply in all later years, until you revoke it. It can be revoked without approval only on an amended return and within time limits. After that, revocation requires IRS approval.
• Scope: the election applies to all of the taxpayer's income-producing real property in the US, not to one property by choice.
• Stopping the 30% withholding: you give the tenant or the management company Form W-8ECI, and then they do not withhold 30% of the gross.
• Filing deadline: someone with no wages in the US and no office there generally files by June 15 of the following year. According to the IRS, in order not to lose the right to deduct expenses, the return must be filed no later than 16 months after the due date.

2Which expenses may be deducted in the US?

In the net track you deduct the regular expenses of a rental property: mortgage interest, local property tax, insurance, management fees, repairs and maintenance, homeowners association (HOA) fees and professional fees. The most important expense is depreciation: a residential rental building is depreciated in the US over 27.5 years. Land is not depreciated, so the purchase price must be allocated between the building and the land.

The example is a hypothetical calculation and not a real case, but the logic recurs in almost every leveraged property: in the net track the US tax in the first years is very low and sometimes zero. It is important to remember that the depreciation that was required will “come back” on sale, as gain taxed at a maximum rate of 25%. In addition, most states also tax the income, under their own rules.

3What does the tax treaty between Israel and the US say about rent?

The treaty, which entered into force on January 1, 1995, provides that income from real property, including rental, may be taxed in the state where the property is located (Article 7). That is, the US has the primary right to tax the rent, and Israel, as the country of residence, taxes it too but must give a credit.

• Article 26(3) of the treaty: Israel will grant an Israeli resident a credit for the income taxes paid to the US, up to the portion of the Israeli tax that is attributable to the income from the US.
• The treaty has no separate net track: the election to be taxed on a net basis is made under US law (Section 871(d)), and not by virtue of a special article in the treaty.
• LLCs and partnerships: under Article 3 of the treaty, a transparent entity is treated as a resident only to the extent that its income is taxed in the hands of the partners as residents. This is one of the reasons why the classification of the LLC in Israel is critical for the credit.

4How is rent taxed in Israel: 15% or marginal tax?

An Israeli resident is taxed on income worldwide, and therefore also on rent from the US. For rent from a property abroad there are two tracks in Israel:

In the 15% track two things are important to understand. First, it is calculated on the gross: if the management company deducts the management fees, insurance and taxes before it transfers the money, the 15% is calculated on the amount before the deductions. Second, it gives no credit for the US tax, so tax paid in the US is an additional cost.

In the marginal track, the net income is added to the other income and taxed according to the brackets, and the US tax is offset against it. When the US tax is low, for example thanks to depreciation and interest, the Israeli tax in the marginal track can be low, and sometimes there will be almost nothing to pay. When the net income is high and the investor is in a high bracket, the 15% track may be cheaper. The comparison needs to be calculated anew each year, according to the actual figures.

5How does the credit for US tax work in Israel?

The credit reduces the Israeli tax by the amount of the tax paid in the US on the same income, up to a ceiling. These are the main rules:

1. The basket method: the credit is calculated by type of income. Tax paid on rental income is offset against the Israeli tax on rental income, and not against the tax on income of another type.
2. Ceiling: the credit will not exceed the Israeli tax that applies to the same income.
3. Carry-forward: unused foreign tax can be carried forward up to the next five tax years, linked to the index, in the same basket.
4. Final tax only: the credit is given for a final tax that is not refundable. Withholding at source that will later be refunded does not qualify. Documentation is required: the US return, confirmation of payment or an assessment.
5. State tax: you need to check with the accountant whether state income tax paid is recognized as a credit, and to what extent.

6How do you report to the Israel Tax Authority?

An Israeli resident who has rental income from abroad is generally required to file an annual return (Form 1301). The income from abroad is detailed in a dedicated appendix (Form 1324, “Appendix D”), in which each type of income is assigned to the appropriate fields in the return. The amounts are translated into shekels at exchange rates, and it is important to keep all the documents: leases, management company reports, the 1040-NR return and evidence of payment of the tax.

• Property held in an LLC: the manner of reporting depends on the track chosen under Income Tax Circular 5/2004. Income Tax Position 116/2025 adds a reporting obligation for holding more than 25% in a foreign transparent entity.
• Depreciation in Israel: depreciation for tax purposes in Israel is determined under Israeli law, and is not necessarily identical to US depreciation. An adjustment is required.
• National Insurance: according to some sources, rent from abroad under the 122A track that does not reach the level of a business is not subject to National Insurance contributions. This is a subject worth checking with the accountant.

7An annual checklist for an Israeli investor with a rented property in the US

1. Before the rental begins: obtain a US identification number (ITIN or EIN depending on the structure) and give the management company Form W-8ECI.
2. Keep orderly records of expenses and make sure the management company issues a detailed annual report.
3. By June 15 (as a rule): file the 1040-NR return, including the election statement in the first year, and a state return if required.
4. If the property is in a single-member LLC: also file Form 5472 attached to a pro forma Form 1120.
5. In Israel: choose a track (15% or marginal), calculate the credit and file the annual return with the foreign income appendix.
6. Update the depreciation calculation and the original cost balance in both countries, to be ready for the day of sale.

8Before you sign: how we accompany an income-producing investment in the US

The track under which the rent will be taxed is decided even before the purchase, because the holding structure (personal, LLC or another entity) and the financing determine how much tax you will pay each year. We build the structure with the investor, coordinate between the US accountant and the Israeli accountant, and make sure that the management contract obliges the management company to provide reporting that makes it possible to file correct returns in both countries.

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The information in this guide is general in nature and does not constitute legal or tax advice on any specific transaction. Every transaction is assessed on its own facts.