What should i do with my US homes?
Moving to a new country can be overwhelming. Some of the biggest decisions surrounding making aliya involve real estate – Should I sell my current home? Should I rent it out? Should I buy a property in Israel right away or wait?
When addressing these questions, the current and future tax implications, both in the U.S. and in Israel, are not always considered as part of the decision-making process. If not considered ahead of time, when the time comes to pay taxes, there may be some nasty surprises.
This article will focus on the sale of the oleh’s principal residence in the U.S.
The tax rules in the US and in Israel differ significantly. Areas of taxation that need to be considered include (but are not limited to): tax on the gain from the sale of real property, tax implications of renting out the property, tax benefits of an oleh in Israel, etc.
One of the common misconceptions when making aliya is that “if I sell my property in the U.S. and buy a property in Israel right away, I won’t owe taxes on the sale.” Unfortunately, that is not the case.
When selling a property in the U.S. upon making aliya, if the property was owned by the oleh and used as the oleh’s principal residence for 2 out of the 5 years immediately prior to the sale (and was never rented out), up to $250,000 of gain ($500,000 for married filing joint filers) can be excluded from federal taxation (state rules may differ). If the property has been rented out previously (or will be before sale) or the full two year period is not met, then part (or all) of the gain may not be eligible for exclusion and tax would be due on that part (or all) of the gain. Further, if the sale does not occur until after oleh benefits end, additional tax may be due in Israel (with a credit for tax paid in the U.S.).
If the property is to be rented out, federal (and possibly state) tax may be due on the rental income. If the rental continues after the completion of oleh benefits, tax may also be due in Israel (with a credit for tax paid in the U.S.).
Obviously, taxes are not the only consideration when deciding whether to sell or rent out one’s principal residence when making aliya. With the proper tax planning, unexpected taxes can be avoided and one of the stresses of aliya can be minimized.