Sometimes our Israeli clients wish to purchase real estate in America and open a bank account under their own name, while not opening an American corporation. If the client wants to manage the real estate under their own name in America as an Israeli, here’s what we can do:

If one of our Israeli clients is seeking to either move to America or to purchase the building(s) in America, they may want to refrain from opening an American company and only register the business and the company bank account under their own name.

First, we have to look at whether the client wants to move to America, or if they are just looking to invest in American real estate from where they live in Eretz Yisrael. In the case that they want to move to America, they should apply for a social security number. See other articles on related issues.

If a move to America is not the intention, they must apply for an ITIN number so that they can report to America on the American taxable income for their business as an Israeli. We can submit the ITIN application together with the income tax report. Both the ITIN application and the income tax report are all submitted together after the first year of operations. However, since they are visiting America, they will file the IRS Form 1040-NR as an American non-resident with tax reporting responsibilities.

To protect our client, we must count the number of days they stayed in America during the current year, the prior year, and 2 years prior. We must determine if a Treaty position is required to protect the client from being considered an ‘accidental’ resident of America. An accidental resident of America would be forced to report all of their income, regardless of where it was earned, to America on a tax report for that year. That is not what we want!

The IRS requires certain forms to be filled out as the Yisraeli is an owner of a ‘foreign’ disregarded entity. Just as a sole proprietorship is a disregarded entity that is reported with the owner’s tax report, a non-incorporated business owned by a Yisraeli is a ‘foreign’ disregarded
entity. In other words, the Yisraeli does business in America under their own name, without formally registering a company.

The IRS also allows the business to decide how it wants to report on its American tax reports, if the organization does not elect any change it will automatically be a ‘foreign’ disregarded entity with the client, a Yisraeli owner. It is prudent to request a federal identification number for the business, although a sole proprietorship doesn’t need one if its owner has a social security number or ITIN.

While ‘resident aliens,’ Yisraeli’im who live in America or meet the requirements to be considered a resident of America, these individuals have the very same tax reporting and paying responsibilities as American citizens — non-resident individuals such as our clients who
make business in America under their own name while living in Eretz Yisrael report what is called effectively connected income — that which is from their trade or business — on their IRS tax report. The 2017 and onward tax law requires that all American companies and people who pay Yisraeli’im or Yisraeli companies must withhold 30% income tax payments from them automatically. Our client will be approached by all payers and asked to fill out a form to acknowledge and accept this. We are able to counter that.

This is because if the payment will be used for our client’s business, we can remove the withholding requirement so that the payer does not withhold. We would inform them that our client will be filing an income tax return. The FDAP withholding is intended to give the client an
easy option so they can allow the tax to stay with the IRS and not file any tax return. Normally, we do not recommend this because of our goal of bringing the client’s effective tax rate to a level significantly below 30%. However, FDAP withholding can also be modified by taking a Treaty position.

As of the law introduced in 2017, an IRS form is required to report net operating losses that are limited now for sole proprietorships. If all the client’s operations combine for a loss of at least $255,000 USD (or twice that for married people), this form is required to be reported with the loss/carryover request because it is a disregarded entity. When real estate is purchased, it must be depreciated on another IRS form. There are some cases where building purchases can be expensed as tax deductions more completely, but we don’t recommend this because later the sale can cause ‘recapture’ of those deductions, and they may be reversed, causing tax liabilities
for the client.

Real estate rental income can be considered a passive activity or an active activity for our client. The IRS requires a form to report the way gains and rental income (or losses and deficits) are reported and at what tax rates for the client. Also, the gains and losses on the purchase and sale of those buildings can sometimes be considered capital gains and losses and sometimes business income and losses, which changes the tax rates on sales proceeds to the client. And we must also look at ‘investment income and expenses’ for our wealthier clients.

We must discern whether the real estate business is a passive or an active activity on another IRS form. This has a significant impact on how the assets are reported and how the incomes they generate are taxed. Most real estate rental income is reported as a passive activity unless the client is an ‘active real estate professional dealing in real estate full-time as their ‘primary employment’. Note that passive activity losses on rental income that are accumulated from earlier years are able to be offset against passive activity gains but they cannot be offset against income that is not passive in order to reduce the client’s tax exposure. These capital and passive loss limitations have a direct relationship, so deducting losses on real estate rental income is not recommended. If the losses continue, the client should reconsider their strategy. It is better to be profitable when losses are not deductible.

Capital gains and losses on the purchase and sale of real estate itself are required to be reported on another IRS form and Schedule D which are added to the client’s IRS report. We  look at whether the real estate is regularly bought and sold, sometimes held for rent and other times sold for a profit, to make a conclusion as to whether the real estate is a capital asset to the client or if it is instead being used in the client’s active trade or business. Most real estate held by our clients for rental income is considered a capital asset, either a long-term capital asset held for 1 year or more or a short-term capital asset held for less than a year. This is how they are reported.

A building that is not a capital asset is either one that the client bought to use as an office or warehouse for their business itself or one that the client bought to build up/significantly renovate to then be sold at a profit as a result of the value they added to it. In this construction case, the purchase is treated not as a capital asset, but as inventory that is ‘manufactured and later sold for a profit’. These purchases are not reported on Schedule D but are reported as ‘cost of goods sold’ on two other IRS forms. These can be held in inventory from year to year if construction or renovation takes that long. If rents are also involved in these business assets, it becomes complicated for us to discern whether it is a business asset or a capital asset.

Our client will need a real American address in their name to open a bank account in America. And Yisraeli’im cannot open bank accounts for themselves without visiting the American bank. If our client is a resident with either a green card or permanent resident visa and a social security number, they can open a bank account without visiting the United States.

Businesses that are American are permitted to open bank accounts from Eretz Yisrael, as long as they have a real American address. We can set up the American address and help them. However, Israeli businesses are not permitted to open American bank accounts without visiting there.

Yisraeli’im and Yisraeli companies who want to open American bank accounts may be able to,
but they would have to travel to America and request the account opening in person.