March 21, 2016
If you are both an Israeli citizen residing in Israel and a US citizen, you should be aware that when you sell your home in Israel, you might still need to pay capital gains tax in the United States, even though you may be exempt from paying capital gains tax in Israel.
In general, capital gains tax applies whenever there is a difference between the original purchase price and the current sale price (not including inflation increase).
Capital Gains tax in Israel:
The capital gains exemption which allowed an Israeli tax payer to sell a residential property once every four years with a full tax relief was canceled on January 1, 2014. The only tax exemption that remains in force is in a case of an Israeli individual who owns a single home which is his only property in Israel. In this case, you may sell your only home in Israel once every eighteen months with a full tax exemption on any profit gained.
This exemption applies only when the selling price is no higher than NIS 4,500,000. Capital gains tax of 25% will apply on the sum above NIS 4,500,000 even if the sale is of your only home.
Capital gains tax for foreign residents:
Another important change that was made applies to foreign residents. Starting January 1, 2014, foreign residents will receive the exemption from capital gains tax only if they can prove that they do not own a home in their country of residence even if they only own one home in Israel. The Israel Tax Authority will accept such a statement only from the tax authorities of the country of residency, otherwise no exemption will apply.
Capital gains tax in the United States:
US residents who sell their main home have an exemption of taxation on the first $250,000 of gain ($500,000 if married filing jointly).
In general, to qualify for the above exclusion, you must meet both the ownership test and the residency test:
- You owned the home and used it as your main home during at least 2 of the last 5 years before the date of sale.
- Owning a home: If you owned the home for at least 24 months (2 years) during the last 5 years leading up to the date of sale, you meet the ownership requirement.
- Residency test: If your home was your residence for at least 24 of the months you owned the home during the 5 years leading up to the date of sale, you meet the residence requirement.
The 24 months of residence can fall anywhere within the 5-year period. It doesn't even have to be a single block of time. All you need is a total of 24 months of residence during the 5-year period. If you were ever away from home, you need to determine whether that counts as time living at home or not. A vacation or other short absence counts as time you lived at home (even if you rented out your home while you were gone).
If you have a disability, and are physically or mentally unable to care for yourself, you only need to show that your home was your residence for at least 12 months out of the 5 years leading up to the date of sale. In addition, any time you spend living in a care facility (such as a nursing home) counts toward your residence requirement, so long as the facility is licensed to care for people with your condition.
- You are not eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home.
If you transferred your home (or share of a jointly owned home) to a spouse or ex-spouse as part of a divorce settlement, you are considered to have no gain or loss and you have nothing to report on your US tax forms.
Conclusion:
Dual Israeli and US citizens should be aware that when they sell their only home in Israel and receive an exemption from capital gains taxes from the Israeli tax authorities, they might still need to pay capital gains tax in the United States. Therefore if you are a dual citizen, it is recommended, to seek advice from a US attorney or a qualified CPA in order to plan accordingly, before selling your property in Israel, in order to try to mitigate your tax obligations
The content of this article is intended to provide a general guide to the subject matter and is not a substitute for legal consultation. Specific legal advice should be sought in accordance with the particular circumstances.